Earthside Comments: That didn't take long, did it? Within hours of the Congress caving-in to Bush and his cronies on Wall Street, the lament was being raised that the $700 billion bailout isn't going to be enough.
Of course not. What this bailout really is ... is a bailout. It is a bailout for the super, insider elitists to take as much money from wherever they can get it and run. So, by the end of next week, it is highly likely that the economic crisis will be noted by the financial pundits as 'worse'.
Read the article by Nouriel Roubini below and you will see why. Note also the two links to articles in The Economist as the bottom of this post.
Link: Credit Markets to Washington: Bailout Isn't Enough | Associated Press/Yahoo! News
The credit markets finally got a bailout bill, but the stranglehold hasn't let up — a troubling sign that lenders and investors believe the package will only be a baby step in the long road to economic recovery.
The credit markets, where companies go to get cash loans, have seized up since the bankruptcy of Lehman Brothers Holdings Inc. and in anticipation of the $700 billion plan initially voted down by the House. The House passed a revised version of it Friday following the Senate's approval earlier this week, but anxiety about its effectiveness kept demand for Treasury bills high and nearly nonexistent for other types of debt.
Overall, market participants have begun regarding the rescue plan as a medicine for what's ailing the financial system, but not a cure-all.
"At best, we can hope that it stems some of the more intense risk from the credit crisis. It prevents things from spiraling out of hand here," said JPMorgan Chase economist Michael Feroli.
Some are worried, though, that the plan will not work at all.
"Nobody knows how it's going to succeed," said Howard Simons, strategist with Bianco Research in Chicago. "It seems the American public had better sense than Wall Street and Washington — the American public said, don't throw good money after bad."
The Treasury will buy banks' risky mortgage-backed assets in an effort to alleviate investors' worries about the institutions' solvency and free them up to do more lending. Even if those efforts succeed, the effects will be far from instantaneous, and borrowing could remain very expensive for some time. With the economy in such a weak state, lending to consumers and businesses will still appear risky until certain factors — particularly employment and the housing market — improve.
The Labor Department said employers cut payrolls by 159,000 in September, the largest loss in more than five years, while unemployment remained at 6.1 percent.
Layoffs are likely to keep piling up if it remains tough to find credit. Spectrum Yarns Inc., a North Carolina textile company, said it closed two plants and laid off 200 workers this week because it got turned down by a North Carolina bank, a New York finance company, and several private lenders.
It could also get even harder for certain individuals to get home loans. Banks have gotten more stringent in their mortgage underwriting, and Wisconsin's affordable-housing agency recently suspended making loans for single-family homes because it was unable to sell tax-exempt mortgage revenue bonds and raise capital.
It's not that financing has completely dried up. For example, Toyota Motor Corp. on Friday offered zero-percent financing on nearly a dozen models to lure customers, who've been having a harder and harder time finding car loans.
But many companies aren't in a position right now to be so aggressive — particularly banks that have been losing billions of dollars on their mortage assets.
On Friday, the London Interbank Offered Rate, or LIBOR, for three-month dollar loans rose to 4.33 percent from 4.21 percent Thursday. That bank-to-bank lending rate has been rising all week, showing that banks are growing less and less willing to lend out their cash for longer than overnight.
LIBOR is tied to many consumer rates like adjustable-rate mortgages.
In one promising sign, overnight lending has gotten significantly cheaper — LIBOR for overnight dollar loans plunged to a hair below 2 percent on Friday, the lowest rate in nearly four years, from 2.67 percent Thursday.
That overnight rate is now below the Fed's key bank-to-bank overnight lending rate, known as the target fed funds rate, of 2 percent. It appears that central banks' decision to ramp up their lending to financial institutions over the past couple weeks is having a positive effect.
But that's little solace to borrowers who need a loan for longer than overnight.
Over the past week, the amount of short-term corporate debt known as commercial paper on the market has plunged. And banks and investment firms have borrowed in record amounts from the Federal Reserve's emergency lending facility.
Money market mutual funds, usually the biggest buyers of commercial paper, have run for safety after a money market fund "broke the buck" two weeks ago due to its exposure to Lehman. When a fund breaks the buck, it does not have enough assets to cover every dollar invested in it. Instead of commercial paper, they've been investing in Treasury bills.
"There's really no theme except the theme of survival," said John Spinello, bond strategist at Jefferies & Co., referring to the constricted trading in the credit markets Friday.
The impact of the credit market seize-up has been widespread, affecting individuals, small businesses, large companies and municipalities.
Gov. Arnold Schwarzenegger said Friday California might to take out short-term loans from the federal government if the markets don't loosen up.
Also Friday, YRC Worldwide Inc., one of the nation's largest trucking companies, said it drew down $325 million on a credit line to repay some debt that matures this year and next.
After the House's vote Friday afternoon, the yield on the three-month Treasury bill slipped to 0.50 percent from 0.70 percent late Thursday. There has been no decrease in demand for T-bills, seen as the safest assets around, even though they are offering extremely low returns. The discount rate on the three-month was 0.47 percent.
There was little change in the strained credit default swap market, either, according to data from Phoenix Partners Group. Credit default swaps are essentially insurance policies against bond defaults; when rates are high, it means the market is betting on a higher probability that a company will fail to pay back its loan.
The stock market sank after the House passed the plan, sending investors back into longer-term Treasurys.
The 2-year note rose 1/32 to 100 26/32, with a yield of 1.58 percent, down from 1.62 percent late Thursday.
The 10-year note rose 7/32 to 103 10/32, and yielded 3.60 percent, down from 3.64 percent.
The 30-year bond rose 1 3/32 to 107, and yielded 4.09 percent, down from 4.16 percent.
Link: Next: The Mother Of All Bank Runs? | Nouriel Roubini/Forbes.com
It's plain that the current financial crisis is worsening in spite of -- or perhaps because of -- the Treasury rescue plan.
The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package.
Financial institutions in the U.S. and in advanced economies are going bust. In the U.S., the latest victims were Washington Mutual (the largest U.S. savings and loan) and Wachovia (the sixth largest U.S. bank). In the U.K., after Northern Rock and the acquisition of HBOS by Lloyds TSB, you now have the bust and rescue of Bradford & Bingley; in Belgium you had Fortis going bust and being rescued over the weekend; in Germany, Hypo Real Estate, a major financial institution near bust, has also needed rescue.
So, this is not just a U.S. financial crisis. It is a global crisis hitting institutions in the U.K., the Euro-zone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).
The strains in financial markets -- especially short-term interbank markets -- are becoming more severe in spite of the Fed and other central banks having injected $300 billion of liquidity in the financial system last week alone, including massive liquidity lending to Morgan Stanley and Goldman Sachs.
In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked.
After the bust of Bear and Lehman, and the merger of Merrill with Bank of America, I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnight liabilities. Instead, Morgan and Goldman took a cosmetic approach, converting themselves into bank holding companies as a way to get further liquidity support -- and regulation as banks -- from the Fed and as a way to acquire safe deposits.
But neither institution can create, in a short time, a franchise of branches, and neither one has the time and resources to acquire smaller banks. And the injection of $8 billion of Japanese capital into Morgan and $5 billion of capital from Warren Buffett into Goldman is a drop in the ocean, as both institutions need much more capital.
Thus, the gambit of converting into banks while not being banks yet hasn't worked, and the run against them has accelerated in the last week: Morgan's CDS spread went through the roof on Friday to over 1200, and the firm has already lost over a third of its hedge-fund clients together with the highly profitable prime brokering business (this is really a kiss of death for Morgan). And the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress: Most of its lines of business (including trading) are now losing money.
Both institutions should stop playing for time, as delay will be destructive: They should merge now with a large foreign financial institution, as no U.S. institution is sound enough and large enough to be a solid merger partner. If John Mack and Lloyd Blankfein don't want to end up like Richard Fuld, they should do a John Thain today and merge as fast as they can with other large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan.
The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way, Mack and Blankfein should sell at a major discount before they end up like Bear and are offered, in a few weeks, only a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up, as they are both much bigger than Bear or Lehman, and their collapse would have severe systemic effects.
When investors don't trust even venerable institutions like Morgan Stanley and Goldman Sachs, you know that the financial crisis is as severe as ever. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets, you know this is a global crisis of confidence in the financial system.
The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates -- as it may now -- a total meltdown of the U.S. financial system could occur.
The U.S. and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 basis points reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.
Nouriel Roubini, a professor at the Stern Business School at NYU and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
2008 Forbes.com LLC™
Link: World on The Edge | The Economist
America's Congress is not used to being second-guessed. But as lawmakers wrestled in the Capitol, world stockmarkets have been giving real-time odds on the Bush administration’s $700 billion bail-out becoming law. After the plan’s thrashing by the House of Representatives on September 29th, spurred on by voters’ loathing of “casino capitalism”, investors panicked. Yet as The Economist went to press, they were optimistic that, after winning the Senate’s approval on October 1st, the plan would pass.
Even if it does, that should not be a cause for optimism. Look beyond the stockmarkets, especially at the seized-up money markets, and there is little to see except bank failures, emergency rescues and high anxiety in the credit markets. These forces are drawing the financial system closer to disaster and the rich world to the edge of a nasty recession. The bail-out package should mitigate the problems, but it will not avert them. ... MORE
Link: Blockages in the Money Markets | The Economist
Any good tradesman will tell you the importance of the bits of a house that you cannot see. Never mind the new kitchen: what about the rafters, the wiring and the pipes? So it is with financial markets. The stockmarkets are the most visible: as they soar or swoon, the headline-writers get to work. The money markets, however, are the plumbing of the system. Normally, they function efficiently and unseen, allowing investment institutions, companies and banks to lend and borrow trillions of dollars for up to a year at a time. They are only noticed when they go wrong. And, like plumbing, when they do get blocked, they make an almighty stink.
At the moment, these markets are well and truly bunged up. In the words of Michael Hartnett, a strategist at Merrill Lynch, “the global interbank market is effectively closed.” The equivalent of a run on banks has been taking place, without the queues of depositors seen outside Northern Rock, a British mortgage bank, last year. This stealthy run has been led by institutional investors and by banks themselves. ... MORE
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