STOCK MARKET WATCH, Tuesday March 18

[ozymandius]

Source: du

STOCK MARKET WATCH, Tuesday March 18, 2008

COUNTING THE DAYS
DAYS REMAINING IN THE * REGIME 309
DAYS SINCE DEMOCRACY DIED (12/12/00) 2613 DAYS
WHERE'S OSAMA BIN-LADEN? 2339 DAYS
DAYS SINCE ENRON COLLAPSE = 2630
Number of Enron Execs in handcuffs = 19
ENRON EXECS CONVICTED = 10
Enron execs conveniently deceased = 3
Other Arrests of Execs = 54

---

U.S. FUTURES & MARKETS INDICATORS
NASDAQ FUTURES-----------------------------S&P FUTURES

---

AT THE CLOSING BELL WHEN BUSH TOOK OFFICE on January 22, 2001
Dow - 10,578.24
Nasdaq - 2,757.91
S&P 500 - 1,342.90
Oil - $27.69/bbl
Gold - $266.70/oz.

AT THE CLOSING BELL ON March 17, 2008

Dow... 11,972.25 +21.16 (+0.18%)
Nasdaq... 2,177.01 -35.48 (-1.60%)
S&P 500... 1,276.60 -11.54 (-0.90%)
Gold future... 1,002.60 +3.10 (+0.31%)
30-Year Bond 4.28% -0.07 (-1.52%)
10-Yr Bond... 3.31% -0.11 (-3.13%)






GOLD, EURO, YEN, Loonie and Silver

---

PIEHOLE ALERT

Heads Up!
Preliminary info on appearances by Bush & Co. throughout the country. Details & links are added as they become available so check back. And if you know more, are organizing something, or would like to, contact [email protected]

For information on protests and other actions Citizens For Legitimate Government

---

Read more: du

[ozymandius]

1. Market WrapUp: The Year of Living Dangerously

Printing Our Economy Back to Prosperity?
BY TONY ALLISON

“May you live in interesting times” goes the oft-quoted Chinese proverb. This year certainly qualifies, although for most the word “uncertain” is more appropriate. While the public reels from recession, and soaring food, energy and health care costs (among others), the road ahead appears shrouded in fog.

Down Goes Bear Stearns

Last Friday Bear Stearns in effect had a “run on the bank” and received emergency resuscitation from J.P. Morgan and the Federal Reserve. Over the weekend, we learn that J.P. Morgan bought Bear Stearns for a mere $2 per share (down from $170 in January 2007), staving off bankruptcy. Lehman Brothers recently received a $2 billion credit line. Other “too big to fail” banking institutions may soon be on the “watch list.” To use a Ben Bernanke term from last spring, the credit debacle is less than “well-contained” as the de-leveraging of the financial system continues at a torrid pace.

The Federal Reserve invoked an obscure Fed statute to lend capital to a private, non-commercial bank institution last week. It wouldn’t reveal how much cash it loaned, but this rare action goes back to the dark days of the early 1930’s. Could things be worse than the Fed is letting on? Some analysts believe so. If Bear Stearns were allowed to go under, "it has the potential of bringing down the whole market," said Richard Bove, an analyst at Punk, Ziegel & Co. We are indeed in uncharted territory, and this year may well be one for the history books.

.....

Investment Implications

As the inflation horse has been let out of the barn by the Fed, the likely implication is that inflation will increase at a faster rate. This is already in evidence if one looks at the rate of increase in the oil price over the last two years. With further government intervention and additional money printing nearly inevitable, the commodity sector will continue to thrive. Of course even the strongest bull markets have severe pull-backs along the way, so don’t be surprised to see one this year. Use it as an opportunity to buy. The inflation story is just getting under way, and the next Paul Volker is nowhere in sight.

http://www.financialsense.com/Market/wrapup.htm

[Kolesar]

9. inflation will increase at a faster rate,... the commodity sector will continue to thrive

Now there's some information I can sink my teeth into.

Funny is that the first thing that comes to mind is that Cleveland's 150 year old mining and shipping company, Olglebay-Norton, just failed. Their gold-cuff-links CEO from a decade back got them into a terrible position by taking big risks. They have been bought.

[ozymandius]

2. Today's Reports

8:30 AM Housing Starts Feb
Briefing Forecast 980K
Market Expects 995K
Prior 1012K

8:30 AM Building Permits Feb
Briefing Forecast 1010K
Market Expects 1020K
Prior 1061K

8:30 AM PPI Feb
Briefing Forecast 0.1%
Market Expects 0.3%
Prior 1.0%

8:30 AM Core PPI Feb
Briefing Forecast 0.2%
Market Expects 0.2%
Prior 0.4%

2:15 PM FOMC Policy Statement

http://biz.yahoo.com/c/e.html

[UpInArms]

34. U.S. Feb. single-family housing starts fall to 17-year low - U.S. Feb. PPI rises 6.4% year over year

09. U.S. Feb. single-family housing starts fall to 17-year low
8:30 AM ET, Mar 18, 2008 - 3 minutes ago

10. U.S. Feb. single-family starts fall 6.7% to 707,000 pace
8:30 AM ET, Mar 18, 2008 - 3 minutes ago

11. U.S. Feb building permits fall to 16-year low
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

12. U.S. Feb. housing starts better than 990,000 expected
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

13. U.S. Feb. building permits fall 7.8% to 978,000 pace
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

14. U.S. Feb. housing starts fall 0.6% to 1.065m pace
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

15. U.S. Feb. core PPI up most since November 2006
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

16. U.S. Feb. core PPI rises 2.4% year over year
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

17. U.S. Feb. core PPI rises 0.5%, more than expected
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

18. U.S. Feb. PPI rises 6.4% year over year
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

19. U.S. Feb. producer price index rises 0.3%
8:30 AM ET, Mar 18, 2008 - 4 minutes ago

[ozymandius]

3. Oil steady above $106 after steep fall

SINGAPORE - Oil prices steadied Tuesday in Asia after falling more than $4 a barrel overnight as investors worried that the sale of Bear Stearns Cos. is a sign of deep economic trouble in the United States.
....

The deal, while averting a bankruptcy filing for Bear Stearns, showed the severity of the fallout from the country's credit problems. Prices of oil and other commodities plunged as investors mulled the next round of financial woes following the Bear Stearns sale.

.....

The contract dropped $4.53 to settle at $105.68 a barrel Monday, hours after crude futures reached a new trading high of $111.80.

Traders were focusing on the Federal Reserve's meeting later Tuesday. The bank is expected to aggressively cut a key interest rate even lower as it races to contain spreading financial fires that threaten an economic meltdown.

http://news.yahoo.com/s/ap/oil_prices

[Ghost Dog]

68. Oil rebounds ahead of Fed move

LONDON (Reuters) - Oil rebounded on Tuesday on expectations a Federal Reserve interest rate cut will hit the U.S. dollar and spur investor demand for oil.

U.S. crude rose by $1.45 to $107.13 a barrel by 10:45 a.m. EDT, while London Brent was $2.29 higher at $104.04.

/... http://news.yahoo.com/s/nm/20080318/bs_nm/markets_oil_dc;_ylt=AhIDpxDbeiJNuvJfycwJsF2573QA

[Ghost Dog]

70. Court reverses Exxon freeze on Venezuela assets

LONDON (Reuters) - A British judge has lifted a $12 billion freeze on Venezuelan assets awarded to U.S. oil major Exxon Mobil (XOM.N) in a spat over a seized oil project.

An English court had frozen the assets of Venezuela's state oil company in January so cash would be available if Exxon won arbitration over an oil project which was lost in President Hugo Chavez's nationalization drive.

But after hearing Petroleos de Venezuela's arguments, the judge ruled against Exxon, the world's largest nongovernment-controlled oil company by market value.

Lawyers for PDVSA said Exxon had not applied for leave to appeal against the ruling and that the judge awarded legal costs against Exxon and ordered the Texas-based company to pay compensation for any damages caused by the imposition of the freezing order.

Exxon declined to comment on whether it would appeal the ruling, but said it had no impact on the company's claim for compensation for the seized assets in arbitration.

/... http://news.yahoo.com/s/nm/20080318/bs_nm/exxon_venezuela_dc;_ylt=ArD18X7njKSPPTGRNdJoO7i573QA

[Demeter]

113. Oooh! That's Gotta Smart!

[ozymandius]

4. Fed poised to cut rates again

WASHINGTON - The Federal Reserve is expected to aggressively lower interest rates in its intensified battle against the credit crisis and spreading economic weakness. The question is whether all of the effort will turn the tide.

Federal Reserve Chairman Ben Bernanke and his colleagues have already been working overtime, employing a variety of novel approaches to keep the economy out of a recession or at least moderate the impact of any downturn.

More relief is expected Tuesday when the central bank is expected to cut a key interest rate by between one-half and a full percentage point.
.....

Many economists believe the Fed will deliver another three-quarter-point cut or perhaps even a full one-point reduction at Tuesday's meetings because Fed officials will not want to disappoint fragile financial markets, which have been on a rollercoaster ride in recent days as they have watched Bear Stearns Cos., the nation's fifth largest investment house, suddenly be brought down by the equivalent of a run on the bank.

http://news.yahoo.com/s/ap/20080318/ap_on_bi_ge/fed_credit_crisis

[Political Heretic]

92. How many times can they do this before it doesn't matter?

Is the the only thing they ever do for economic crisis? Cut rates over and over?

[ozymandius]

5. After Bear Stearns rescue, who's next?

NEW YORK - With a deal in place to save Bear Stearns from bankruptcy, the company's shares traded above the offer price Monday even as investors began turning a critical eye to other investment banks amid worries about how far the credit contagion could spread.

Despite the weekend agreement for JPMorgan Chase & Co. to buy Bear Stearns for a fraction of its value last week, worries that other banks had sizable exposure to troubled credit markets sent global markets tumbling. The uncertainty was evident on Wall Street, where the Dow Jones industrials sank by more than 100 points.

.....

Instead of making money, Bear Stearns employees trudged boxes of their personal belongings out of the investment bank while JPMorgan managers filed into it for the first time from that bank's headquarters directly across the street. While no layoffs have been announced, analysts expect that they could be significant.

.....

JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns' 14,000 employees worldwide, or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.

http://news.yahoo.com/s/ap/20080317/ap_on_bi_ge/jpmorgan_bear_stearns

[ozymandius]

7. Lehman rout tests Fed's resolve

NEW YORK (Fortune) -- The Fed's resolve to defend the stressed-out U.S. financial system was put to an early test Monday when investors bet that Lehman Brothers could be the next Wall Street giant to fall.

The brokerage firm saw its shares drop as much as 39% in early trading in wake of JPMorgan Chase's $2-a-share purchase of Bear Stearns (BSC, Fortune 500). Monday's selloff took Lehman (LEH, Fortune 500) shares to $24.50, down from $39 Friday, before they staged a mild recovery.

The collapse of Bear Stearns has fueled fears of a widespread breakdown in the U.S. financial system. Lehman, like Bear Stearns, has been a big player in the mortgage market in recent years and investors worry that its exposure to now-toxic mortgage-based securities, combined with its relatively small size, might be fatal. Lehman is the fourth-largest U.S. player on Wall Street, behind Goldman Sachs, Merrill Lynch and Morgan Stanley.

http://money.cnn.com/2008/03/17/news/lehman.fortune/index.htm?postversion=2008031804

[formercia]

11. No early trading report on Lehman Bros.

http://finance.yahoo.com/q?s=LEH

in case you want to keep an eye on the stock.

[Ghost Dog]

67. Merrill riskiest after Bear Stearns, says Wachovia

(Reuters) - Merrill Lynch (MER.N) is the riskiest major broker after Bear Stearns (BSC.N), with gross exposure to subprime collateralized debt obligations of $30.4 billion, 3.3 times the sector average, Wachovia Capital Markets said.

Merrill also had the worst liquidity ratio at 52 percent, compared to Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc (LEH.N), and now has the highest leverage in the industry at 31.9 times, analyst Douglas Sipkin said.

Shares of Merrill Lynch rose 7 percent to $44.05 in morning trade, after upbeat earnings from Goldman Sachs and Lehman Brothers led to a rebound in financial stocks.

Sipkin, however, said fears about the ability of U.S. investment banks to continue as going concerns are misguided.

"While liquidity conditions are more challenging than at any time in recent history, the failure of BSC was more a management issue than a market issue in our opinion," the analyst wrote in a note to clients.

/... http://news.yahoo.com/s/nm/20080318/bs_nm/brokers_research_wachovia_dc;_ylt=AgJQoroppjvvdL0gtW5ZjjW573QA

[ozymandius]

6. World markets attempt rebound before Fed decision

LONDON (AFP) - World stock markets aimed higher on Tuesday before a widely-expected sharp cut in US interest rates as the Federal Reserve seeks to ease the global credit crisis that sank Bear Stearns, dealers said.

There were growing fears that even a hefty rate cut of up to one percentage point might not be enough to ease the gridlock in the US financial system and ward off the spectre of a US recession, they said.

In European morning deals, London jumped 1.99 percent, Frankfurt gained 1.91 percent and Paris won back 1.43 percent.

All three markets had plunged Monday by around 3.5-4.0 percent as investors dumped equities on fears of a ballooning credit crisis following the emergency sale of troubled US investment bank Bear Stearns, dealers said.

http://news.yahoo.com/s/afp/20080318/bs_afp/stocksworld

[Ghost Dog]

17. Asian Stocks Rise, Led by Insurers; China's Equities Tumble

March 18 (Bloomberg) -- Asian stocks rose, led by Japanese insurers and technology companies, on speculation earnings will withstand a global slowdown. China's equities plunged after Premier Wen Jiabao pledged ``forceful'' steps to fight inflation.

...

``There's bargain hunting going on,'' said Renault Kam, who helps manage $6 billion at Atlantis Investment Management in Hong Kong. ``Markets need to wait until after the first half of this year to stabilize. Investors are still cautious.''

The MSCI Asia Pacific Index gained 0.9 percent to 133.50 as of 7:23 p.m. in Tokyo, after falling as much as 0.6 percent earlier. The benchmark is still down 15 percent this year.

Japan's Nikkei 225 Stock Average added 1.5 percent to 11,964.16, the first gain in four days. China's CSI 300 Index slumped 5.1 percent to an eight-month low and was the biggest decline among Asian benchmarks. Other indexes were mixed.

...

A measure of six metals traded on the London Metal Exchange, including copper, zinc and nickel, tumbled 4.7 percent yesterday, the most since Aug. 16, 2007. Copper and aluminum fell 4 percent, the exchange-imposed daily limit, on the Shanghai Futures Exchange today.

/... http://www.bloomberg.com/apps/news?pid=20601080&sid=aKvIiJdT5bkc&refer=asia

[Ghost Dog]

18. China Stocks Drop to 8-Month Low as Wen Vows to Fight Inflation

March 18 (Bloomberg) -- China's stocks plunged for a fifth day, pushing the benchmark to its lowest in eight months, after the government pledged to combat inflation at an 11-year high.

Tsingtao Brewery Co., part-owned by Anheuser-Busch Cos., fell the most in nine months after Premier Wen Jiabao promised ``forceful'' measures to curb rising prices. Jiangxi Copper Co. tumbled by the daily limit of 10 percent on concern slowing economic growth will erode demand for raw materials. Only five of 300 companies in the CSI 300 Index rose, and the measure had the biggest drop among Asia's stock benchmarks today.

``There is a consensus that China's economic outlook is pessimistic after these official comments,'' said Zhang Ling, who manages the equivalent of $1.1 billion with ICBC Credit Suisse Asset Management Co. in Beijing. ``We expect a hard landing for the economy, which will substantially eat into earnings growth.''

The CSI 300, which tracks yuan-denominated A shares listed on China's two exchanges, declined 201.33, or 5.1 percent, to 3,763.95, the lowest close since July 16. About 50 of the 300 companies on the gauge fell by the 10 percent daily limit. The index is 36 percent below its record high on Oct. 16.

A measure tracking consumer stocks dropped 7.1 percent today, the steepest decline among the CSI 300's 10 industry groups. Tsingtao Brewery slumped 2.91 yuan, or 9.9 percent, to 26.54 yuan, the sharpest drop since June 4. Kweichow Moutai Co., the maker of Moutai, the fiery liquor used at official banquets, lost 11.17 yuan, or 5.6 percent, to 189.54 yuan.

...

Prices rose 8.7 percent in February from a year earlier on food costs and supply disruptions caused by the worst snowstorms in half a century. The central bank raised interest rates six times last year to cool an economy that expanded 11.4 percent, the fastest pace in 13 years.

There is still room to raise interest rates and increase reserve ratios for commercial lenders, central bank governor Zhou Xiaochuan told reporters in Beijing today.

The government's 4.8 percent inflation target for 2008 will be ``difficult'' to achieve, Wen said today at his annual press conference given at the end of the National People's Congress meeting in Beijing. China will tackle soaring prices with ``appropriate and forceful'' measures, he said.

/... http://www.bloomberg.com/apps/news?pid=20601080&sid=ak9lzeMfbLNw&refer=asia

[Ghost Dog]

24. China Increases Bank Reserve Ratio to Cool Inflation

March 18 (Bloomberg) -- China told banks to set aside more reserves for the second time this year, hours after Premier Wen Jiabao said the government will take ``forceful'' steps to damp inflation at an 11-year high.

Lenders must place a record 15.5 percent of deposits with the central bank, up from 15 percent previously, the People's Bank of China said in a statement on its Web site today. The increase will take effect on March 25.

China will tackle soaring prices with ``appropriate and forceful'' measures, Wen said at his annual press conference at the end of the National People's Congress in Beijing. Stocks tumbled the most in seven weeks on concern China's battle against inflation will slow the economy, which expanded 11.2 percent in the fourth quarter.

``Raising the reserve ratio is just a mild start'' for the government that was appointed yesterday, said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. ``A series of monetary tightening measures, including interest rate increases and stricter lending controls will be gradually rolled out.''

Central bank Governor Zhou Xiaochuan signaled today he may raise interest rates just as the U.S. is poised to cut them to stave off a recession.

The central bank has held off on raising interest rates this year after six increases in 2007 that pushed the one-year lending rate to a nine-year high of 7.47 percent.

/... http://www.bloomberg.com/apps/news?pid=20601080&sid=aUvFkSKPXwtw&refer=asia

[Ghost Dog]

19. Hong Kong May Ditch Dollar Peg as Currency Drops, Says Nomura

March 18 (Bloomberg) -- Hong Kong may be forced to abandon its 24-year-old fixed exchange rate to the dollar, following countries around the world ditching pegs to the falling U.S. currency, said Nomura Holdings Inc.

Hong Kong's currency has slipped against 14 of the 17 major currencies in the past year, boosting import costs and accelerating inflation to the highest in nine years. China ditched a dollar peg in 2005, Kuwait last May became the first Gulf Arab state to drop its currency's link to the dollar and Qatar is considering altering its foreign-exchange rate.

``It comes down to a political decision,'' said Sean Darby, head of regional strategy at Nomura, Japan's biggest brokerage, in an interview with Bloomberg Television in Hong Kong. ``Inflation has picked up and normally social unrest comes with that. That's what happened in the Middle East.''

The Hong Kong dollar, which is allowed to trade 5 cents either side of HK$7.8, was at HK$7.7674 per U.S. dollar as of 12:18 p.m. local time, near the highest this year. Darby says he favors Hong Kong currency forwards, which allow investors to bet on the currency's future movements. The 12-month Hong Kong dollar forward was at HK$7.7213 per U.S. dollar.

The Hong Kong Monetary Authority sold HK$7.828 billion ($1 billion) last year to defend its link to the dollar as the yuan accelerated gains and funds flooded into the city to subscribe to share sales by Chinese companies.

The peg is ``working very well,'' de-facto central bank chief executive Joseph Yam said Jan. 7. Hong Kong Chief Executive Donald Tsang, who spent $15 billion stopping the currency from weakening in 1998, has previously said he is committed to the peg because it provides stability.

`Out of Favor'

``Pegged-rate systems are falling out of favor,'' Darby wrote in a research note this month. ``We are surprised investors are not accounting for potential change in Hong Kong's exchange-rate regime.''

In May 2005, the government introduced a band, pledging to buy or sell the currency should it rise or fall more than 5 Hong Kong cents either side of HK$7.8 to the dollar. Prior to that the authority guaranteed to buy 7.8 Hong Kong dollars for every U.S. dollar.

The future of Hong Kong's peg also depends on China's yuan, Darby says. China's yuan has accelerated gains, up 3.1 percent this year, compared with about 7 percent for all of 2007.

``If we see a revaluing of the yuan, that will probably spell the end of the Hong Kong dollar peg,'' Darby said. China's central bank governor Zhou Xiaochuan said today market participants shouldn't believe rumors that the government would revalue the yuan.

/... http://www.bloomberg.com/apps/news?pid=20601080&sid=ac._d9jlkYPs&refer=asia

[Ghost Dog]

20. The dollar in Japan: Investment risk or opportunity?

TOKYO, March 18 (Reuters) - The rapid rise of the yen to a 13-year high against the dollar is unprecedented for many Japanese investors, prompting them to think twice about keeping funds in the beleaguered U.S. currency.

Others though, such as many of Japan's retirees, see an opportunity in paying less than 100 yen for one U.S. dollar for only the second time in recent history.

Resona Bank, Japan's fourth-largest bank, said the number of new dollar deposit accounts opened in the first 17 days of March was six times greater than for the whole of February.

"Retail clients were definitely in action. There were twice as many new dollar deposit accounts openned on Monday alone as there were for the whole month of February," a spokesman said. He declined to be specific.

The differing reactions from investors partly reflect just how dramatic the fall in the dollar has been against the yen.

It dropped as low as 95.77 yen on Monday, down 14 percent so far this year, already one of the biggest moves in a quarter in eight years. In the first quarter last year the dollar fell just 1 percent against the yen and during all of 2007 it fell just over 6 percent.

/... http://www.reuters.com/article/marketsNews/idINT29700420080318?rpc=611

[ozymandius]

8. I'll check back later folks.

:donut: :donut: :donut:

Another interesting day during interesting times is in store for us. I'm personally not looking forward to it.

:hi:

[Joanne98]

10. Lehman up in Germany

http://de.finance.yahoo.com/q?s=LEM.BE

[Joanne98]

12. London shares rebound ahead of Fed rate decision

http://www.marketwatch.com/news/story/financials-strong-ftse-higher-ahead/story.aspx?guid=%7BE83E3532-33C4-4B25-A2DD-82E5317111E5%7D

[Ghost Dog]

36. European stocks recover, Fed rate cut awaited

Tue Mar 18, 2008 12:46pm GMT
PARIS, March 18 (Reuters) - European stocks jumped by midday on Tuesday, recouping some of the previous session's sharp losses on hopes that the U.S. Federal Reserve would deliver a big interest rate cut and the global credit crisis would ease.

Better-than-feared quarterly results from Wall Street firms Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) and Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) also helped soothe investors' worries over the impact of the crisis on banks' books.

Recently hammered banking stocks led the rebound, with UBS (UBSN.VX: Quote, Profile, Research) up 10 percent, Credit Agricole (CAGR.PA: Quote, Profile, Research) up 7.1 percent and Deutsche Bank (DBKGn.DE: Quote, Profile, Research) up 4.4 percent.

By 1234 GMT, the FTSEurofirst 300 index of top European shares was up 2.4 percent at 1,228.34 points.

...

"It seems the Fed is close to outright panic. Last week's liquidity injection was an attempt to shift markets away from expecting a 75bp rate cut today. After the last few days, the markets are betting now on a 100bp rate cut. I don't believe the Fed can afford to disappoint market expectations," Robert Lind, equity analyst at ABN AMRO, wrote in a note.

...

In a research note, Lehman Brothers said stock markets are in "overshoot" territory and that when the bounce comes it will be a strong one, citing an aggressive U.S. Federal Reserve, attractive valuations and a slowing in the rate of earnings downgrades.

"Events in the past couple of days indicate that global equity markets have moved on from discounting the recessionary impact of lower earnings to considering the implications of a systemic reduction in the availability of credit to otherwise profitable businesses and creditworthy households," Lehman's global equity strategist Ian Scott wrote in the note.

/... http://uk.reuters.com/article/eurMktRpt/idUKL1881147620080318

[Ghost Dog]

37. FTSE rebounds, banks lead as Fed verdict expected

Tue Mar 18, 2008 12:21pm GMT
LONDON, March 18 (Reuters) - Britain's FTSE 100 .FTSE index surged 2.6 percent by midday on Tuesday as hopes of a chunky U.S. rate cut lifted shares and helped banks rebound from steep falls on Monday after the Bear Stearns (BSC.N: Quote, Profile, Research) firesale.

At 1202 GMT, the blue-chip index was 142.8 points higher at 5,557.2 after the FTSE 100 hit its lowest closing level since late 2005 on Monday.

...


UK banking and financials benefited most from the positive sentiment, accounting for over 42 index points. Among individual stocks, Barclays (BARC.L: Quote, Profile, Research), HSBC (HSBA.L: Quote, Profile, Research) and HBOS (HBOS.L: Quote, Profile, Research) added between 3.8 and 5.6 percent.

...

"You can't make an intelligent, forward conviction because you just don't know (what lies ahead)," Richard Cunningham, analyst at City Index Advisory said. "That said, I suspect we may push ahead a bit further from here over the next few days...some of these stocks have been significantly oversold."

/... http://uk.reuters.com/article/londonMktRpt/idUKL1810154420080318

[Ghost Dog]

72. Europe shares extend gains on higher US open

Tue Mar 18, 2008 10:07am EDT
LONDON, March 18 (Reuters) - European stocks extended gains on Tuesday as U.S. stocks soared ahead of an expected interst-rate cut by the Federal Reserve and results from Goldman Sachs (GS.N: Quote, Profile, Research) and Lehman Brothers (LEH.N: Quote, Profile, Research) offered some relief.

At 1400 GMT, the FTSEurofirst 300 index of top European shares was up 3.1 percent at 1,237.19 points, as U.S. indexes gained more than 2 percent.

/.. http://www.reuters.com/article/marketsNews/idCAL1883547820080318?rpc=611

[Ghost Dog]

118. European stocks close up 3.5% before Fed decision

LONDON, March 18 (Reuters) - European stocks jumped 3.5 percent on Tuesday as hopes for a steep U.S. rate cut and above-forecast results from Goldman Sachs (GS.N: Quote, Profile, Research) and Lehman Brothers (LEH.N: Quote, Profile, Research) provided relief to a battered financial sector.

The FTSEurofirst 300 index closed up 3.5 percent at 1,241.99 points, but this was not enough to recoup all the previous day's 4.4 percent loss. The index is down nearly 18 percent this year.

The rebound was led by recently battered banking shares with UBS (UBSN.VX: Quote, Profile, Research) -- a major victim of the credit crunch -- jumping more than 14 percent, Credit Suisse CSGN.VC gaining 10.4 percent and HBSC (HSBA.L: Quote, Profile, Research) rising more than 7 percent.

Nearly all U.S. primary dealers now believed that the Federal Reserve would cut key short-term rates by at least three-quarters of a percentage point late on Tuesday. Fed fund futures showed a 92 percent chance of a 1 percentage point cut.

"Because of how jittery things are and how uncertain things are, whenever you get these little bits of positive news, you do tend to get a jump and it may be exaggerated a bit," said James Hughes, market analyst at CMC Markets.

/... http://www.reuters.com/article/marketsNews/idCAL1885903020080318?rpc=611

[Ghost Dog]

119. FTSE soars 3.5 pct on hopes for hefty US rate cut

LONDON, March 18 (Reuters) - Britain's top shares surged 3.5 percent higher on Tuesday as the prospect of a hefty U.S. rate cut and forecast-beating results from Lehman Brothers (LEH.N: Quote, Profile, Research) and Goldman Sachs (GS.N: Quote, Profile, Research) calmed shaken investors.

The FTSE 100 .FTSE leading share index ended up 191.4 points at 5,605.8. The index sank 3.9 percent on Monday, hitting its lowest closing level since late 2005, as the fire sale of U.S. investment bank Bear Stearns (BSC.N: Quote, Profile, Research) to JPMorgan Chase (JPM.N: Quote, Profile, Research) sparked fears more banks may fall victim to the credit crisis.

UK banks, which took a whipping the previous day, all rose and together added 59 points to the FTSE 100. Alliance & Leicester (ALLL.L: Quote, Profile, Research) leapt 8.4 percent, Standard Chartered (STAN.L: Quote, Profile, Research) added 7.5 percent and HSBC (HSBA.L: Quote, Profile, Research) rose 7.2 percent.

Wall Street also staged a stellar rally, with shares in Goldman (GS.N: Quote, Profile, Research) and Lehman (LEH.N: Quote, Profile, Research) leading a rebound in financial stocks.

Nearly all U.S. primary dealers now believe that the Federal Reserve (Fed) will cut key short-term rates by at least three-quarters of a percentage point later on Tuesday. U.S. rates currently stand at 3 percent.

Seven of the 20 Wall Street firms which do business directly with the Fed predict the central bank will lower rates a full point to 2.00 percent, which would be the steepest Fed cut in more than 25 years.

"The fact that the authorities are waking up to what they have to do does at least allay some fears and sow the seeds for a recovery in due course," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

"Although upside will be hard-won and gains will be hard work, investor appetite will recover in the second quarter of the year," he added.

/... http://www.reuters.com/article/marketsNews/idCAL1858948120080318?rpc=611

[Joanne98]

13. Americans simply don't have enough money

Americans simply don't have enough money to pay back the mortgage and credit-card debt they've run up. That reality is forcing banks to retrench as loans gone bad shrink their capital bases and falling house prices shrink the collateral that homeowners can borrow against. And it will presumably force chastened consumers to change their ways as well.
Americans simply don't have enough money... What does it mean? It means defaults, economic loss and a spiral of fear and more loss. It means more Bear Stearns. Time's article quotes David Rosenberg, an economist at Merrill Lynch: "I'm not saying we're going back to our parents' level of frugality, but what we have witnessed in the past 20 to 30 years - and especially the parabolic credit growth of the last five years - is going to be bursting in the next decade." If not back to our parents' level of frugality, then what? To our grandparents' level? How can anything less be avoided, in an era when most people are already working full speed, maxed-out and yet still need credit to survive? And now they're cutting off the credit!? The result for households will be the same as for Bear - massive liquidation. And the Fed is in no position to do anything about it. The Fed is currently operating in triage mode - desperately trying to aid the banks and save the global financial system as we know it. But what ammunition does the Fed have to save the average American working stiff, who is up to his eyeballs in debt?

In 2002, Bernanke - concerned with the possibility of deflation - concluded that "under a paper-money system, a determined government can always generate higher spending and hence positive inflation" simply by creating more money. But so far it appears that only half of this equation is correct. Positive inflation, definitely. But by lowering nominal interest rates below inflation, the Fed has made it irrational for individuals to save. Why keep money in a savings account that pays 0.5%, or even in a money market at 3% when the "official" B(L)S inflation rate is 4% and reality-based inflation is closer to 10%? The Fed assumes rational people will simply spend the money instead of saving it, thereby generating increased economic activity. But there is in fact a third alternative that Bernanke did not address, and that is that citizens might choose - Gasp! - to pay off their debts. Time goes on to say that debt is the new four-letter word, and that citizens are catching on to the predatory ways of consumer lending. "Several polls have shown that large majorities are planning to use the tax rebate coming later this year to pay off debt rather than buy new stuff," it says.

Deflation was the scourge of the first great depression, and it is what Bernanke was hired to prevent. With his years of study and deep knowledge of the Great Depression Bernanke is one of the world's foremost academic experts on the Depression. It would be a supreme irony if the second great depression were to unfold on his watch. But as I write this - 10pm on Sunday night - news across the wire is that the Fed has cut the discount rate another .25%, effective immediately, and is offering more ways for financial institutions to borrow money to help prevent another institutional bank run Monday Morning. All this on a Sunday night. This is unprecedented, and shows just how panicked the Fed is to soften the crisis. Meanwhile, Asian markets are down 2-3%, as are US futures indices. So Far, the Fed has proven powerless.
http://globaleconomicanalysis.blogspot.com/

[Tansy_Gold]

144. Isn't that the definition of bankrupt?

"Americans simply don't have enough money to pay back the mortgage and credit-card debt they've run up."

Correct me if I'm wrong, but isn't the whole point of "credit" that you borrow money that you don't already have, with the expectation that you WILL have it in the future and at that point you will pay it back?

Are we therefore at a point at which the borrowing has become so extensive, so deep, so pervasive, that there is no capacity to pay it back in the foreseeable future?

I had a friend back in Indiana many, many years ago who bought a new pick-up truck about every three or four years. He didn't pay much attention to the trade-in value or how much he was financing, so long as he could make his payments every month. This went on for twenty, thirty years, until finally the salesman pointed out to him that he was financing about 250% of the value of the truck! The trade-in value was always lower than what he still owed on each truck, so he just refinanced the whole thing. But he was never in a position to pay off what he owed. When he died, he owed about $10,000 on a truck worth about $1500. But hey, he had a new truck every couple of years!

Has the U.S. economy reached that point?

[Demeter]

14. We Are Being Bernanke'd By amydemiceli

Original Content at http://www.opednews.com/articles/genera_amydemic_080317_we_are_being_bernank.htm




Markets around the world sank overnight. England's banks were all down on Monday some nearing ten percent and Asian markets took a massive beating. The Hang Seng Index plunged 5.2 percent and the Nikkei fell 4.5 percent. While the dollar hit a 13 year low against the yen, the lowest since 1995 and a record low against the euro. This was the result of the Feds aggressive, unexpected moves over the weekend while no one was looking.

Bear Stearns

Ben Bernanke, the Fed chairman said he took such aggressive moves to "provide financial institutions with greater assurance of access to funds," in the wake of the collapse of Wall Street's fifth largest investment bank Bear Stearns. Thursday Bear was worth over 6 billion dollars and on Friday there was a run on the bank and its value quickly declined to 3.5 billion dollars. Bear Stearns was ready for bankruptcy and the Fed agreed to back them up. Although they could not lend them the cash (30 million dollars) to stay alive it could use JP Morgan as a bridge. But as soon as the Fed offered the loan they seemed to have called it in within 24 hours, and JP Morgan Chase & Co announced that it would steal, I mean buy, Bear Stearns for $2 a share, valuing the U.S. investment bank at about $236 million, less than the cost of the building! The bank fell apart so quickly, at its peak Bear Steans was selling for $171 a share just over a year ago, January 2007.

The Fed forced this transaction and now to ease worries they opened up these types of loans to all investment banks like Bear Stearns, the set up is in place and the consolidation of America's banks has begun. This is the big story today, the historical choice for the Fed to open the discount window to more banks, (the place banks go when they’re in trouble) a sure sign that more trouble is on the way. Tomorrow the Fed will meet again and more extreme cuts are expected. Even though these rate cuts have caused us unbearable inflation the MSM is still heralding the Fed as the savior of the Global economy.

The big question now is what bank is next in line to be sacrificed, who will be consolidated by the central bankers, how many and how quickly will they be wiped out.
But most important, how many more dollars is Bernanke prepared to print?






Authors Website: www.noonehastodietomorrow.us
Authors Bio: Amy de Miceli is a freelance writer, with offices in New York and Miami.

[Demeter]

15. What is happening with the economy? By Dr. Abbas Bakhtiar

Original Content at http://www.opednews.com/articles/genera_dr__abba_080316_what_is_happening_wi.htm




the madness begins with those who have high tolerance for financial risk. That is to say they are rich and can afford greater financial loss than others. They speculate and make money, lots of money. Soon the less wealthy see this and join the crowd and before you know it the whole country is involved. When President Bush entered office he gave one trillion dollars (tax cut) to the wealthy. In effect he increased the tolerance for financial risk of the wealthy individuals and companies even further. Later, he started the Iraq war, pouring billions of dollars into the economy. One should not forget that when the US government spends about $2 billion a week in Iraq, most of that money finds its way back into the US economy (salaries, armament, etc). But all these monies were borrowed money (deficit spending), and all the growth and feeling of well being was illusory.
The money pumped into the economy had to find some channel for investment. So banks and financial institutions began to push money in hope of getting incredible returns. Easy credit was the solution. You want to buy a house? No problem, we finance 90% of it. You want to have a new car? No problem, we give you a loan. This push suddenly made it possible for millions of people to buy houses, putting pressure on the housing market. House prices sky-rocketed, increasing the illusion of increasing wealth, which in turn allowed people to borrow more money. All the time, banks and credit institutions were jubilant at the sight of extraordinary returns on their investments. A normal credit company charges around 18% to 23% on the dollar while they borrow the same money for 8% to 9%. It is a great business. The banks also had a good time. Cheap money was lent to people backed by assets that were appreciating in value. The risks were spread by selling mortgages to other banks and institutions. Before you knew it every bank, insurance company and god knows who else were rushing in to take their piece of the action.Growth in housing construction represents a substantial part of general US economic growth. So with easy credit and continuing increase in housing prices, US showed a good growth rate, giving the illusion of well-being.

But as with Tulips and DotComs manias, there comes a time when there is no more room for illusory growth and demand. The bubble bursts and asset prices crash. The banks are left with depreciating asset guarantees for their loans and before you know it the whole financial system is in trouble. Usually when this happens, it takes a few years for the companies and individuals involved to go bankrupt, after which the cycle starts anew. Hopefully with lessons learnt. But this time it is different. When a recession starts, the government has a few tools at its disposal to deal with the economic downturn: Interest rate, the budget and war. It reduces interest rates to stimulate economic growth. It can also start large infrastructure projects such road building, constructing bridges etc, to reduce unemployment and stimulate the economy (deficit-spending). There is another sure way of kick starting the economy and that is WAR. Wars are good for businesses and reduce unemployment and stimulate (for US) important parts of the economy. However, all three tools have been already used prior to the recent recession. US has huge trade deficit and is involved in two wars (Afghanistan and Iraq). It has also reduced its tax revenues by giving huge tax-cuts to the rich. Large trade deficit, low tax revenue, tremendous debt, wars and low interest rates make it extremely difficult for the government to do much to help the economy.

If this was not enough its currency “the mighty dollar” is losing its position as the preferred international reserve and trading currency. The Federal Reserves keeps pumping dollars into the market, while at the same time keep reducing interest rates. This means only two things, a devaluation of dollar and an increasing inflation. Countries such as China, Japan, oil producing countries and others keep their reserves in dollar. These reserves are in the order of trillions of dollars. Imagine a 15% decline in value of dollar will translate to $150 billion dollar loss for the Chinese government alone. How long will these countries tolerate this loss is anyone’s guess, but surely there comes a time when these countries will react and begin to switch to other currencies. It is then that we will see the real collapse of the US economy.

There is already some ominous sign of this. A few days ago, Venezuela declared that it will no longer sell its oil in dollars. Currently there are Iran, Venezuela, and Russia that have decided to trade their oil and gas in other currencies. In addition, some Arab countries have started to de-peg their currencies from dollar. For these countries peg to dollar has meant importing inflation and they are trying to stabilise their economy. As dollar decreases in value and more and more raw-material producers switch away from dollar, this de-pegging will only increase. This will put further pressure on the dollar contributing to its decline. This, of course is not good for the US consumers. When times were good (illusory) US kept its inflation in check by importing goods from countries such as China, India, and other places; where imports were paid with dollars. Now some stuff has to be paid for in Yen and Euro both of which are appreciating in value against the dollar. At the same time oil and gas prices have increased tremendously, not only in dollar term but also in other currencies. All these things mean that US has to pay many more dollars for the goods that it imports. In simple terms, US’ inflation is rising rapidly. In my opinion, the US government is not telling the American people the real truth, fearing further collapse in confidence.

The outlook for the US economy

When recession hits, the government usually starts deficit spending to increase employment. At the same time the interest rates are reduced to stimulate economic growth. United States is now in an unenviable position of entering recession with very low interest rates, huge deficit and declining dollar... the government has not the ability to meet its existing financial obligations to the American people, let alone starting infrastructure projects to reduce unemployment or help the economy.

With regards to the interest rates, the Federal Reserves has very little room for manoeuvre. Already the real interest rates are in negative territory (lower than inflation), although the government and the experts say otherwise. Further interest rate cuts will only increase inflation and devalues the shaky dollar even further. But this is exactly what the Federal Reserves is doing. This is most likely to rescue big financial institutions, the very institutions that were earning huge profits from unsuspecting American consumers. In effect, the Fed is abandoning the poor and helping the rich. If the government was serious in helping the working American, it would have paid the money directly to the people, so that they could pay their debt. Instead it is pouring hundreds of billions of dollars into the banks. If you count the monies that have been poured into the financial markets, you’ll see that $160-$200 billion dollar tax rebate to the people was only mere peanuts as compared to what banks and others have received.

All in all, one can say that this recession, if it doesn’t turn into a depression, will be severe and will last at least 2 to 4 years. Technically a recession may last one year, but the effect of that recession on families may last a decade. Some lose their homes, some their jobs, some families will break-up and so on and so forth. The human misery of technical recession lasts much longer than the recession itself. Anyway, if the price of the houses is dropped by 40% in two years, how many years of growth will it take to retake that 40%? Usually much longer than people think.



The World Economy

It is said that when the US sneezes the world catches cold. This was true before but the world has started to think that it can decouple itself from the US economy. Here the umbilical cord is the US dollar; once that is cut, slowly but surely the decoupling will take place; with dire consequences for the US. As I mentioned before, already some important oil producing nations have decided to abandon the dollar. Others have decided to de-peg their currencies. Others such as China have started thinking about reducing their reserves in dollars. Once others begin to do the same the dollar will cease to be the international reserve and trade currency of choice. Meanwhile, major trading partners have to just bite the bullet and accept the consequences of holding to the dollar.
...But they don’t do this out of love. They just need stability to reduce their dollar holdings gradually and hence save as much of their reserves as possible. If they mention this openly, the dollar will collapse over-night and they lose. So the long-term plan would be to reduce their exposure to the dollar as gradually and as quietly as possible. This of course doesn’t mean that the value of dollar will not fluctuate; it simply means that over time dollar will become just like any other currencies and will be treated similarly. The Federal Reserves will no longer be able to just print money and refuse to publish the M3 statistics. US will also need to begin building reserves in other currencies. Today US dollar has no backing. People accept dollar on faith alone. Imagine if that faith suddenly disappears. Will you exchange 1 kg of green paper for 1000 Microwaves? I doubt it.

But meanwhile the world’s economy will experience the negative effects from the US economic downturn. The case for the European Union is straight forward. A flight from dollar to Euro makes the EU’s export much more expensive, just when one of its biggest trading partners “US” goes into recession. European Union will also feel the pains of financial crisis of the US. Many EU financial institutions had invested in US and now they will have to accept the losses. So we will see a down ward trend in Europe, but not as severe as the one in US. In addition European Central Bank has still a lot of room for manoeuvre. It can reduce interest rates substantially. EU also has smaller total deficit than US. Most importantly, most of the EU countries have solid social security nets in place which will dampen the effects on their citizens.

Of course this is not written in stone. The US government may come to its senses and decides to act responsibly and allow many companies and banks to go under. It may try to support dollar. It may try to cut the budget deficit or the trade deficit. It may even decide that its war in Iraq was not and is not such a good idea and withdraw its troops. It may even try to get friendly with Venezuela and Iran, thereby reduce both the price of oil and pressure on the dollar. The truth is that it is the US president that can do these things and not the Federal Reserves. We just have to wait for the elections and see who is elected as the next president.







Authors Bio: Dr. Abbas Bakhtiar lives in Norway. He works as a management consultant.He is also a contributing writer for many online journals.

[Ghost Dog]

23. The US economy is about to suffer a painful dose of reality. About time, too

The Bear Stearns collapse heralds the end of the culture of easy lending - and it won't be just America feeling the heat

* Bill Emmott
* The Guardian,
* Tuesday March 18 2008

The collapse and fire sale of Bear Stearns, the fifth-largest US investment bank, may seem bad news, but it is actually good. The excesses of Wall Street firms in recent years were so egregious that a shake-out simply had to happen. Since the credit crunch became manifest last August, we have in effect been waiting to see some blood spattering on to those broad investment-banking braces. It would have been a travesty - and rather surreal - if we had had to wait much longer.

...

What that means is that America - the world's biggest economy, accounting for more than a quarter of world output - should be bracing itself for a pretty nasty recession. Worries about inflation, through high food, oil and commodity prices, are keeping long-term interest rates high in any case. Now lending practices are going to add to the squeeze. Unemployment has begun to rise, though it remains low at 4.8% of the workforce, which is probably why economic troubles are still not yet the dominant issue in the presidential election. By the summer, when the election proper begins and the candidates have (at last) been chosen, the economic pain could well be severe.

For that reason, the main risk for the rest of the world from America's financial crisis is that, as well as blaming Wall Street, American politicians will start to blame foreigners. There has already been some anti-trade rhetoric in the Democratic primaries; given that John McCain, the Republican candidate, is a committed free trader it must be likely that whoever is his Democratic opponent will bang the trade drum loudly, attacking principally China (an easier target following the crackdown in Tibet) but also other big trading partners, including Europe. If a Democrat wins in November, and enters office with the Democrats also controlling Congress, the likelihood of protectionist legislation next spring will be high.

...

The most intriguing question, though, is what will be the effect in the fast-growing economies of China and India - economies that optimists are relying on to keep the world economy spinning. Their high savings rates mean that they will not face the same credit crunch as America. But China in particular is facing a worryingly high inflation rate - 8.7% in the year to February - for which its only real solution can be a risky and potentially painful revaluation of its currency against the dollar.

When that happens, some will wail about the dollar's final collapse. But actually, like the fall of Bear Stearns, this will be a welcome acceptance of reality. Faced by huge capital imbalances, reckless lending and vast trade deficits, the world has long needed a shake-out on Wall Street as well as a rebalancing between the dollar and the Asian currencies. The first of those has now begun. The second still lies ahead.

/article & comments... http://www.guardian.co.uk/commentisfree/2008/mar/18/useconomy.marketturmoil

[Wednesdays]

41. Why do you hate Murika?

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x3019420

:eyes: :sarcasm:

[DemReadingDU]

16. Healthcare fraud trial in Columbus, Ohio - 2nd trial update

3/17/08 Jury picked in National Century CEO's bribery trial

Seven women and five men have been picked as jurors to decide if a Central Ohio CEO and an associate tried to bribe a government witness in the fraud trial triggered by the collapse of National Century Financial Enterprises Inc.

The federal court trial of Lance Poulsen, once the head of Dublin-based National Century, began Monday in Columbus with jury selection. Attorneys for the U.S. Justice Department and the defendants drained a pool of more than 60 candidates to select 12 jurors and two alternates for what is expected to be a week-and-a-half-long trial.

Poulsen, 64, of Port Charlotte, Fla., was indicted with Karl A. Demmler, 57, of Columbus, last October on charges they attempted to bribe former National Century executive Sherry Gibson with $500,000. The government has alleged Poulsen, a co-founder of the now defunct National Century, expected Gibson's testimony would be so damaging that he planned to pay her to develop a case of "amnesia" when she was called to the witness stand.

Gibson testified in a related trial that ended last week with five former executives at National Century being convicted on conspiracy, wire fraud and securities fraud charges.

National Century's business was financing health-care providers by buying their accounts receivables at a discount and packaging them as asset-backed bonds for sale to investors. But Gibson testified at the recently concluded trial that Poulsen directed her in a scheme that resulted in millions of dollars in advances being sent to companies that Poulsen and two other National Century executives owned. Gibson testified she and others doctored company records to hide a fraud that ended with National Century being put into bankruptcy in 2002 and leaving nearly $3 billion unaccounted.

Gibson pleaded guilty to a count of conspiracy to commit securities fraud and spent three years in a federal penitentiary. She was forced to give up her $420,000 net worth to the government and agreed to cooperate with the Justice Department's investigation.

She is expected to testify in the Poulsen-Demmler trial and likely will tell jurors that Poulsen planned to pay her through a legal services company that Demmler set up.

Poulsen and Demmler face a count each of conspiracy to obstruct justice, witness tampering and witness tampering by influencing testimony. They have denied the charges.

After the jury left Monday, U.S. District Court Judge Algenon Marbley asked Poulsen and Demmler if they were aware of a plea agreement offered to them by the government. Both defendants acknowledged the offer. Demmler went a step further, telling Marbley the government's offer was nothing "substantial."

Opening arguments in the trial are scheduled to begin Tuesday morning.

http://www.bizjournals.com/columbus/stories/2008/03/17/daily10.html


edit to add link for previous articles
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3230276&mesg_id=3230393

[Demeter]

21. Bad News for Bear Shareholders is Good News for the Markets

http://www.portfolio.com/views/blogs/market-movers/2008/03/17/bad-news-for-bear-shareholders-is-good-news-for-the-markets


Two dollars per share is an astonishingly low price to pay for Bear Stearns: when I first saw it I honestly thought it was a misprint. If Bear is essentially worth nothing, that means other banks - Lehman seems to be the latest in the crosshairs - are also worth less than the market thought on Friday. But overall the rescue of Bear Stearns by JP Morgan is a good thing for the international financial system, and a good thing for the markets. Here's a bit of late-Sunday-night analysis to set you up for what's likely to be a very volatile Monday.

One of the more admirable things about Bear Stearns was always its strong culture of employee ownership. And one of the good things about being able to name your price is that you can buy a venerable investment bank for $2 a share. But, as Ken Houghton points out, the two great tastes don't necessarily go well together: It's always been especially true at BSC that the assets walk out the door at the end of the day. The question now is how many of them will bother to walk in the door on Monday....My guess is not all that many. JP Morgan on its conference call Sunday night talked about the costs of "retention for key people at Bear Stearns" - but more to the point the Bear Stearns bankers are now JP Morgan bankers, and JP Morgan has never been particularly stingy with its bonuses. The Bear Stearns bankers want this deal to go through, because it means they will continue to be employed. The alternative is bankruptcy and liquidation, which is much riskier for them - so they're likely to vote their shares in favor of the deal...Institutional investors, too, are likely to be sanguine about this deal, they might not be happy, but they know that $2 is better than nothing. Individual investors might vote against - one individual who somehow managed to get through on the conference call was clearly unhappy and said he would do just that - but those individuals don't own enough of the stock to make much of a difference. The individuals who do have large shareholdings, like Joe Lewis, are likely to accept the deal and then, if they feel particularly aggrieved, litigate in its wake: an unspecified chunk of the $5 billion plus in closing costs that JP Morgan outlined in its presentation come under the general heading of "litigation".

One thing which was clear from the conference call is that JP Morgan seems to be taking Bear Stearns at its word when it comes to the $84 (ish) book value: CFO Michael Cavanagh said that he was "very comfortable with the levels at which Bear Stearns has marked its positions". The discount to book is a function of having to do a complex deal within the space of one weekend, as well as the difficulties of digesting a major investment bank during a period of extreme market volatility. Oh, and the fact that the chances of any other bidders coming along are remote.

And what about the $30 billion non-recourse Fed facility? It seems that this is a case of JP Morgan getting all of the upside (it's buying the equity at a price-to-book ratio of 2.4%, and a price-to-extra-future-earnings ratio of 0.24) while the Fed takes most of the downside. But even there JP Morgan said quite explicitly that the Fed facility is very much expected to be repaid in full, and that the reason for its existence was that they simply didn't want to have to dump tens of billions of dollars' worth of illiquid assets into this market as they delever Bear. "JP Morgan is perfectly comfortable with the assets that we're acquiring, but with the financing support of the Fed, the deleveraging will be a very orderly process," said Cavanagh....The big risk with this deal is that the markets will take the price paid for Bear as a mark, and will sell off the other four investment banks accordingly. After all, if you strip out the value of the headquarters building, Bear's shareholders are essentially paying JP Morgan $1 billion to take the bank off their hands. If Bear's worth less than zero, is Lehman really worth $20 billion?

And that's why I'm not a huge fan of the cut in the Fed's primary credit rate, either: it seems panicky and prone to backfiring. What's more, if they're cutting the discount rate - and it seems that that's exactly what they're doing - they should say so, rather than just talking about a "primary credit rate" which no one's ever heard of. In any case, given that they were scheduled to cut the discount rate on Tuesday, did they really need to do that now, and make themselves seem even more jittery and panicky than they needed to?

In any case, the Fed is now lending money to investment banks - which it doesn't regulate - at exactly the same rate at which it lends to regulated commercial banks. While Jamie Dimon has shown himself to be decisive and opportunistic this weekend, Ben Bernanke looks increasingly like a schmuck who'll do anything Wall Street asks him to do...Certainly this is the kind of deal which only gets done when things are Really Really Bad, and there are a hell of a lot of stock prices right now which don't look Really Really Bad at all. Personally I think a nice down day for the Dow could be just the ticket, especially if it coincides with a little bit of spread tightening on the fixed-income side of things as traders start to pile into the moral hazard play. That would help bring stock prices into line with bond prices, and even possibly set the stage for a nice rally when the Fed cuts rates by 100bp on Tuesday.

[Demeter]

22. Should the Fed Save Wall Street Firms?

http://blogs.wsj.com/economics/2008/03/17/should-the-fed-save-wall-street-firms/


Joseph Mason, an economist at Drexel University who has studied bailouts, weighs in on the moral hazard problem created by the Federal Reserve’s intervention (in the name of market stability) to prop up Bear Stearns on Friday and the Fed’s $30 billion loan to support J.P. Morgan Chase’s purchase of the firm.

The deal announced with J.P. Morgan still leaves the possibility that the Fed will retain significant counterparty risk. Such an arrangement is akin to the FDIC’s practice of covering all deposits, even those in excess of $100,000 during the thrift crisis. If counterparties are not deterred from contracting with weak institutions immediately the stage will be set for unsound institutions to sell risk on the cheap, on the presumption that the Fed will act as a backstop.

… Unlike a commercial bank there is no social need to rescue Bear. Commercial banks’ funding through consumer deposits necessitates a maturity mismatch: Bear chose a similarly mismatched funding structure. Bear also chose to be one of the largest originators of a mortgage product that turned out to be not only uneconomical, but economically harmful. To support such funding and investment practices would therefore be entirely socially and economically inappropriate.

The regulators need to end their denial and come to terms with the fact that the credit losses will substantially harm some firms. Getting away with realizing those losses and dealing with them effectively by attracting capital to the sound institutions and closing the unsound will speed recovery and ameliorate the recession.

[UpInArms]

27. Rescue Tests the Credibility of the Fed

http://www.nytimes.com/2008/03/18/business/18fed.html?ex=1363492800&en=d987e1a93f11c5a5&ei=5088&partner=rssnyt&emc=rss

WASHINGTON — Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street’s biggest institutions from their far-reaching mistakes.

<snip>

And no one knows how much the Fed could lose if the borrowers fail to repay their loans or whether hundreds of billions of dollars will ultimately have to come from taxpayers to shield the nation’s financial system from ruin.

In recent weeks, the central bank announced a series of emergency short-term loan programs that totaled about $400 billion. But on Sunday, Fed officials raised the stakes by offering investment banks a new loan program without any explicit size limit.

These moves, along with a $30 billion credit line to help JPMorgan Chase take over the failing Bear Stearns, is fraught with more than financial risk.

The biggest danger is damage to the Federal Reserve’s credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.



...more...

[UpInArms]

52. Fed's Bear Bailout Hobbles Free Markets

http://www.smartmoney.com/tradecraft/index.cfm?story=20080317-capitalism

WE'D LIKE TO think that the Federal Reserve, or government in general, is some sort of genie with the magical ability to save stocks, rescue real estate and avert recession all with a wave of the hand. But after several rate cuts from the Fed, a "stimulus" program from the president and promises of more regulation from Congress, markets are in chaos. Stocks are down double digits for the year, and currencies, bonds and commodities are all extremely volatile.

No free market goes up forever without interruption. But it's my belief that the government's escalating intervention, including the Fed's latest moves on Sunday, isn't helping matters, but rather making them far worse.

The seeds of financial crisis have been sown by the various government backstops and bailout programs that encourage banks, brokerages and other financial institutions to take on unsustainably high levels of risk. Instead of having to accept the consequences of bad judgment, as businesses should, the message is being sent that the American taxpayer stands by to save financial institutions that, in a truly free market, would otherwise be brushed aside into insolvency. That's precisely what we've seen in recent days.

...more...

[wordpix]

62. and what are we saving these corporations with? Our $9 trillion deficit, credit from Saudi A and

China. This US economy is based on tax more, spend, and borrow, repeat and repeat again.

[Demeter]

25. Too Big to Bail: The Fed's Wall Street Dilemma By Pam Martens

http://www.informationclearinghouse.info/article19555.htm

17/03/08 "Counterpunch" -- - Americans learned two new truths last week from the Bush Administration's version of Life's Little Instruction Book: if you're a Wall Street miscreant you're thrown a lifeline; if you're a Wall Street crime fighter you're thrown a land mine.

In the first effort, the Feds effectively handed a Federal Reserve ATM card to JPMorgan to funnel your tax dollars to the teetering Bear Stearns brokerage firm to address counterparty risks that have been building for at least 4 years as the Feds snoozed. Counterparty risk is the trillions of dollars of insurance contracts (credit default swaps and other derivatives) taken out by Wall Street firms on each others (counterparty) bonds, bundled mortgage and commercial debt (collateralized debt obligations). The firms have used unregulated over-the-counter contracts to perform this risk transfer alchemy and funded their own company, Markit Group Ltd., to take the place of a regulated exchange for price discovery.

In the second effort, the Feds tapped the Department of Justice, Internal Revenue Service, U.S. Attorney's office in New York, FBI, five federal judges and a busy federal court to root out that Code Red threat to our national security: consensual sex. The sex involved a prostitution ring and Democratic New York State Governor, Eliot Spitzer, who was savaged and forced to step down by an avenging media mob abundantly fed with well placed leaks from a suspiciously homogenous group called "anonymous law enforcement officials." Governor Spitzer, in his former role as New York State Attorney General, had taken the lead in rooting out Wall Street crimes against small investors because the Federal Reserve was preoccupied with lobbying to remove regulations on Wall Street's crime factory.

As usual, the Feds handed the bill to the governed with no thought to the will of the governed.

While mainstream media called the Bear Stearns bailout the first brokerage bailout since the Great Depression, in truth it was the second in seven months.

The first brokerage bailout came without all the media fanfare because it arrived not on the wings of a public announcement but in five pages of indecipherable Fed jargon addressed to the General Counsel of Citigroup.

Here is the effective message sent by the Federal Reserve to Citigroup in its letter of August 20, 2007: now that we have allowed you to become both too big to fail and too big to bail by repealing the depression era investor-protection law known as the Glass-Steagall Act at your mere beckoning, we have to bend more rules to keep you afloat. So, for example, the rule that says the Federal Reserve is not allowed to lend to brokerages, just banks, from its discount window can be tweaked for you by lending up to $25 billion to you and then we'll let you lend it to your brokerage arm. The Federal Reserve Act rule that says a bank can't loan more than 10% of its capital stock and surplus to its brokerage affiliate, we'll let you go as high as about 30% and say it's in the public interest.

By giving Citigroup an exemption from Rule 23A of the Federal Reserve Act, by allowing it to funnel up to $25 Billion from the Fed's discount window to its brokerage clients who were getting hit with margin calls, the Federal Reserve and Chairman Ben Bernanke telegraphed an incredibly dangerous message to global markets: we're just as unaccountable as Wall Street. The Federal Reserve as enabler under Alan Greenspan created today's problem and today's Crony Fed under Ben Bernanke is killing off what's left of U.S. financial credibility. (I had barely finished typing these words on Monday, March 17, 2008, when a news alert came across my screen advising that the Federal Reserve was taking the breathtaking step of making direct loans to all brokerage firms which are primary dealers for Treasury securities.)

The Federal Reserve is stumbling around in the dark and regularly bumping into the next bailout because it stopped being an independent monetary force and started taking its marching orders from Wall Street quite some time ago.

Here's what Nancy Millar, President at the time of the National Organization for Women in New York City, presciently testified in writing to the Securities and Exchange Commission in August 2001. (Ms. Millar edited and signed this testimony while I and other Wall Street activists provided input. This testimony is available in full on the SEC's web site.)

We thank the Securities and Exchange Commission for extending the comment period to September 4, 2001 in the critical area of bank oversight now that the lines between banks and brokerage firms have been blurred with the repeal of the Glass-Steagall Act.

We believe that the comments made in the letter dated June 29, 2001 from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency should be disregarded in their totality. The banks of America have enough lobbyists and trade associations to argue their case before the SEC. It is not the charter or mandate of these three regulatory bodies to lobby on behalf of banks.

The body of evidence that should dictate how the SEC must now proceed since Congress saw fit to eliminate the critical protections afforded the investing public in the Glass-Steagall Act, resides in the tens of thousands of pages of transcripts of the Pujo Committee hearings held in 1913 and the Pecora Committee hearings of 1933 and 1934. Fancy promises from regulators that banks functioning in the dual role as brokerage firms can and will be self-policing is not what the SEC or Congress should rely on. The well-developed history of egregious abuses bestowed on the investing public prior to the enactment of Glass-Steagall, and since its recent repeal, is what the SEC and Congress must look to. To believe that the dynamics of power and greed have been materially altered in nine decades is to engage in naiveté at the public's peril.

Our Nation's prosperity, democracy and the productivity of its citizens demand a level playing field to acquire and safeguard financial assets. Society crumbles when assets achieved through years of honest hard work can be fleeced by brokerage firms masquerading as insured-deposit banks. It is the role of federal regulators to maintain a level playing field through stringent regulation.

We ask that the SEC immediately impose the same regulations that govern outside broker-dealers to securities' operations within banks. And, we herewith ask Congress to reconsider the repeal of the Glass-Steagall Act or be held accountable for the peril that unfolds from this unwise and inadequately deliberated decision.

If ever there was evidence that America is now facing that peril, it was the most recent news that the Bush administration's much touted "free and efficient market" had priced Bear Stearns at $30 a share at the close of trading on Friday, March 14, 2008 but on further examination of its books over the weekend, it was valued at $2 a share and absorbed by JPMorgan at that price.

Equally troubling is the growing awareness among Wall Street veterans that neither the Federal Reserve nor the U.S. Treasury comprehend was has happened here, much less how to contain it. Here's what we heard from Hank Paulson, the Treasury Secretary, last week:

"regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it."

Innovation? Less efficient? Is there anything at all that looks innovative or efficient about Wall Street today? It is a seized up house of cards built on a toxic formula of hubris, corruption and free market madness.

Before there is a complete breakdown, Congress must quickly address the five key reasons we have today's mess on our hands:

(1) Incentive: from mortgage brokers paid higher fees to sell subprime loans rather than prime loans, to stockbrokers paid dramatically higher fees to sell mortgage-backed securities rather than U.S. Treasury securities, to investment bankers paid dramatically higher fees to package Collateralized Debt Obligations rather than issue plain vanilla corporate bonds, Wall Street has been incentivized to greed rather than honest service to investors.

(2) Artificial Demand: The above outsized incentive produced a glut of unwanted and unneeded product that had to be eventually hidden off Wall Street's balance sheet in Structured Investment Vehicles (SIVs) or dressed up to look like Commercial Paper and buried in mom and pop money market funds. It is this glut and the lack of transparency as to where else this toxic paper is hiding that is creating the fear and panic on Wall Street.

(3) Counterparty Risk: The regulators allowed Wall Street firms/banks to balloon their asset base and pretend they were meeting capital adequacy tests by buying "insurance" in the form of derivative contracts. There was only one problem with these "hedging" techniques; the counterparty in many cases was just another Wall Street firm or an inadequately capitalized municipal bond insurer. Instead of spreading risk, the risk was concentrated among the same players.

(4) Glass-Steagall Act: Congress was incentivized through Wall Street campaign financing to throw reason and judgment out the window and repeal the only law that stood between the country and another 1929. Glass-Steagall must be restored; and public financing of federal campaigns is the only means of restoring the will of the governed to Washington.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at [email protected]

[Danascot]

103. Related article from Oz

* US Federal Reserve 'lacking funds to help crisis'
* Losses yet to come 'easily exceed remaining $400bn'
* Not going to be able to deal with situation on own

FEARS are growing that the US Federal Reserve may soon find itself short of the funds needed to continue propping up the nation's financial system.

The central bank yesterday used its financial muscle to back the bail-out of the stricken Wall Street investment banking giant Bear Stearns, which will be taken over by rival JPMorgan Chase at a fraction of its worth last week.

But analysts believe the threat to the financial system, which continues to flow from the collapse of the sub-prime mortage market last year, is getting too big for the Federal Reserve.

More:

http://www.news.com.au/business/story/0,23636,23393912-462,00.html

[donkeyotay]

104. OMG, this is like The Onion, only not funny.

The firms have used unregulated over-the-counter contracts to perform this risk transfer alchemy and funded their own company, Markit Group Ltd., to take the place of a regulated exchange for price discovery.

From Markit's website:

About Market

Markit was founded in 2001 as the first independent source of credit derivative pricing. Today, our data, valuations and trade processing services are regarded as the market standard in the global financial markets, helping our clients to reduce risk and improve operational efficiency.

As a private company with privileged relationships with 16 shareholder banks, Markit has unparalleled access to a valuable dataset spanning credit, equities and the broader OTC derivative universe. Our unique relationship with the bank shareholders give us the opportunity to work closely with these leading market makers ot develop innovative solutions for the marketplace.

With close to 1,000 institution as clients - including investment banks, hedge funds, asset managers, central banks, regulators, rating agencies and insurance companies - we provide round-the-clock support from our offices in London, New York, Chicago, Toronto, Amsterdam, Brussels, Luxembourg, Tokyo and Singapore.

http://www.markit.com/information/about.html

[donkeyotay]

108. I'm trying to make it through this article without having a stoke.

Governor Spitzer, in his former role as New York State Attorney General, had taken the lead in rooting out Wall Street crimes against small investors because the Federal Reserve was preoccupied with lobbying to remove regulations on Wall Street's crime factory.

Speaking of Greenspan. When last seen (sorry, I don't have the DU thread I saw this on yesterday) Mr. Bubbles was telling oil sheiks to dump the dollar-oil tie to take care of their inflation problems. Nice, he does realize that he just screwed us again. Our dollars are already halfway to worthless, and the mofo is out there telling the world to finish us off.

Another Pam Marten article gives this previous example of Greenspan's mixed results during his stewardship of our economic wellbeing:

Alan Greenspan, Chair of the Federal Reserve Board at the time, testified before Congress in favor of this legislation and asked that it be "expedited." Last week, Mr. Greenspan joined the payroll of the hedge fund, Paulson & Company, which last year made $15 billion in profits betting that poor people's homes would be foreclosed on while using the unregulated over-the-counter contracts that Mr. Greenspan assisted in making possible.

http://www.informationliberation.com/?id=24717

Good grief, I wonder if Paulson & Company are in any way related to that other banking fella working for us. :eyes:

[Demeter]

112. I Shall Have to Post Warnings Then

We can't lose a single intelligent soul to these demons.

[UpInArms]

26. dollar watch

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 71.068 Change -0.395 (-0.55%)

Why the Fed Needs to Cut More Than 100bp

http://www.dailyfx.com/story/bio1/Why_the_Fed_Needs_to_1205789553565.html

Last week, we warned that the Federal Reserve is on high alert and now, we understand why. Pandemonium has hit the financial markets as the US dollar trades below parity against the Swiss Franc for the first time ever, hits a record low against the Euro and a 12 year low against the Japanese Yen. Bear Stearns’ demise has sent shockwaves across Wall Street and everyone is holding their breath for the next shoe to drop. After surprising the markets with a 25bp discount rate cut on Sunday and extending the discount rate window to investment banks, the Federal Reserve is set to make another historic move by cutting interest rates 100bp tomorrow. This would be the first time in over 23 years that the central bank has cut interest rates by more than 75bp during the single meeting, reflecting the severity of the current US economic situation. In reaction to the Fed’s move, the Bank of England and the Bank of Japan have also injected liquidity but the Fed’s efforts have been futile thus far as banks refuse to take on more counterparty risk. Bond yields are also down significantly. The 3 month t-bill rate fell to the lowest level in over 50 years while the 2 year treasury bond yield fell to the lowest level in 5 years. This tells us that the Federal Reserve will need to cut interest rates by more than 100bp. In fact futures traders already expect rates to come down to 1.25 percent by the end of June. However, if Bernanke really wants to reassure the financial markets, he should cut by 125bp tomorrow and come up with more creative ways to prevent another liquidity crisis. We say no more band-aids Bernanke, please give us a real solution. Could the Federal Reserve cut interest rates by 75bp tomorrow? Yes, but as much as the market fears that another bank on Wall Street will collapse, Bernanke fears the consequences of under delivering. Unless he wants to cause the stock market to fall by another 300 points, he will cut interest rates by 100bp and the FOMC statement will remain dovish. The need for further monetary easing and the uncertainty in the financial markets will continue to drive the US dollar lower, particularly against the Japanese Yen. Expect 200 to 300 pip days in the majors to become the norm. Economic data remains weak with the Empire manufacturing survey plunging to a record low and industrial production dropping by 0.5 percent. The current account deficit narrowed but the total net Treasury International Capital flow fell far short of expectations. Before the FOMC rate decision tomorrow afternoon, producer prices will be released.

...more...

Euro and Pound Rise as Markets Stabilize - Will Fed Cut by 100bp?

http://www.dailyfx.com/story/bio2/Euro_and_Pound_Rise_as_1205835835319.html

A sense of relative calm returned to the currency markets after yesterday’s upside reversal in the DJIA helped soothe investors nerves, leading to recoveries in Nikkei, Footsie and the DAX. With no important economic data on the calendar, the EURUSD traced out a tight range in Asia and early European trade as mild return of risk appetite sent EURJPY higher and pushed EURUSD back to the 1.5800 level as a result

Meanwhile, UK inflation data printed a bit cold with core CPI coming in at 1.2% vs. 1.4% expected. Nevertheless the headline numbers continue to register well above the 2.0% BoE targets and as such most analysts believe that UK monetary policy makers will be quite reluctant to ease interest rate aggressively. The market will get a better read on MPC’s intentions when BoE minutes are released tomorrow. For the time being, stabilization in equities helped cable to regain the 2.0100 figure as risk appetite improved.

The marquee event today will undoubtedly be the FOMC interest rate decision due at 16:15 GMT. Only two weeks ago consensus called for a 50bp cut, but given the bailout of Bear Stearns and continued stress in capital markets, the fed funds futures are pricing in a near 100% risk of 100bp cut – an unprecedented amount of easing by the Fed especially at current low interest rate levels which would in effect decrease the cost of burrowing by 33%.

With markets already expecting such a massive rate cut, it’s difficult to gauge if the move has already been priced in. The EURUSD may drop in the aftermath of the announcement in a classic “sell the news” mode. Nevertheless, the longer term impact of Fed’s action is not likely to be dollar friendly. If US rates decline to 2% the EURUSD rate spread will widen to a full 200bp with little evidence that it will have much of a positive impact on US growth. The path of least resistance continues to the upside in the pair and only a series of nasty economic surprises from the EZ is likely to sabotage that one way trip.

...more...

[Ghost Dog]

35. Euro= USD 1.583, GBP 0.787, CHF 1.547 and JPY 152.9 at this time

[Demeter]

28. "Bernankerupted”: Bear Stearns Fire-sale sends Global Markets Plunging; Dollar Routed

http://www.informationclearinghouse.info/article19552.htm

By Mike Whitney

17/03/08 "ICH " Last night, while America slept, investors and dollar-holders around the world held an impromptu election on US stewardship of the global economy. It was a spontaneous referendum triggered by the sudden collapse of Bear Stearns, but it covered many of the issues that have worried investors for the last seven years: the unfunded Bush tax cuts, the $2 trillion war in Iraq, the Federal Reserves low-interest bubble-making policies, the reckless gutting of US industrial base, the $4 trillion increase to the national debt, the multi-billion dollar “no bid” contracts, the opaque deregulated financial system, and the systematic destruction of the world's reserve currency.

The ballots are still being counted, but the outcome is certain. The Bush administration lost in a landslide. Investors have had enough Bush's failed leadership and the Fed's reckless, globally-destabilizing monetary policies. A dollar-rout has already begun in earnest and stock markets around the world are plummeting.

In the end, it was a race with the clock. The Federal Reserve wanted to get a deal done before the Asia markets opened hoping to soothe jittery investors and stop a full-blown stock market crash. It was right down to the wire, too. Less than an hour before trading began on Japan's Nikkei Index, the sale of beleaguered Investment giant, Bear Stearns was announced on Bloomberg News. Backed by a $30 billion line of credit from the Fed, JP Morgan reluctantly purchased Bear for the bargain-basement price of $240 million or $2 per share. Less than a year ago, Bear was riding high at $170 per share, but that was before the credit python had wrapped itself around US financial markets. That seems like ancient history now. Without the Fed's intervention the nearly-century old investment warhorse would have been dragged from Wall Street feet first. If the deal with JPM had flipped, Bear would have been forced into bankruptcy.

But Bear's travails are just the beginning of Wall Street's woes. Now there's talk of Lehman Brothers going under. According to the Wall Street Journal:

“Worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.” (“JP Morgan Rescues Bear Stearns”, WSJ)

Mr. Fuld has good reason to be concerned, too. Economics professor Nouriel Roubini says that, “Lehman's exposure to toxic ABS/MBS securities is as bad as that of Bear: according to Fitch at the beginning of the turmoil Bear Stearns had the highest toxic waste ("residual balance") exposure as percent of adjusted equity on balance sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what? Today Lehman received a $2 billion unsecured credit line from 40 lenders. Here is another massively leveraged broker dealer that mismanaged its liquidity risk, had massive amount of toxic waste on its books and is now in trouble. Again here we have not only a situation of illiquidity but serious credit problems and losses given the reckless exposure of this second broker dealer to toxic investments.” (Nouriel Roubini's Global EconoMonitor)

So, it looks like Bear will be just the first of many over-leveraged investment banks on their way to the chopping block. As credit gets tighter, banks will have to call in their loans to pare down their debts and increase their capital. That's easier said than done in an environment where consumer's are cutting back on borrowing and traditional revenue streams have dried up. The banks are facing some stiff headwinds in the near future.

The Federal Reserve announced two initiatives on Sunday designed to “bolster market liquidity and promote orderly market functioning.”

The Fed is “creating a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.”

This is an incredible move and way beyond the Fed's mandate to insure price stability. Bernanke is now offering to accept dodgy mortgage-backed bonds from NON-BANK institutions. Outrageous. We can be 100% certain now, that Congress's closed door meeting on Friday had nothing to do with Bush's spying on American citizens. Most likely, the Fed convened the meeting to present their extraordinary strategy to save the financial system from a Chernobyl-like meltdown.

The Fed also announced a “decrease in the primary credit rate from 3-1/2 percent to 3-1/4 percent (and) an increase in the maximum maturity of primary credit loans to 90 days from 30 days.” (Fed statement)

So Bernanke has not only decided to bailout the banks but everyone else who is even remotely connected to the subprime/securitization swindle. Great. But the rest of the world is not so convinced that this is prudent economic theory, in fact, foreign investors are already shedding US debt instruments faster than any time in history. Let's hope that Bernanke realizes that foreign Central Banks and investors presently hold $6 trillion dollars of US Treasuries and dollars and can dump it on our shores whenever they choose. That's enough greenbacks to start a Wiemar-type blizzard that will last until Resurrection Day.

Roubini on the Fed's plan to provide loans to non-bank institutions:

“By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.”(Nouriel Roubini's Global EconoMonitor)
It's clear that Bernanke is just making it up as he goes along. His actions are unprecedented and, yes, counterproductive. He's just generating more panic among investors. That doesn't help. Just a few months ago, Bernanke was reiterating his belief that markets should operate with as little government intervention as possible. What a transformation. Now he has nationalized the banking system and is providing a backstop for privately owned brokerages. What's next; a bailout for the hedge funds?

There's still a great deal that we don't know about the Bear buyout. Like why was it so important to save a bank that had invested its shareholders money so poorly in toxic bonds that were virtually untested in stressful market conditions?

It is complicated, but the real reason for the bailout is that the entire financial industry is now inextricably bound together through multi-billion dollar counterparty transactions called credit default swaps and other unregulated derivatives. When one major player is stricken, the whole system can violently unwind.

According to the Wall Street Journal: “With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable...For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.” (“Fed Races to Rescue Bear Stearns In Bid to Steady Financial System”, Wall Street Journal)

So Bernanke felt like he had no choice. He could either bailout Bear or sit back and watch a daisy-chain of defaults take down one bank after another. Of course, there was another option. The Fed and the SEC could have fulfilled their responsibilities as regulators and insisted that derivatives trading come under the purvue of government officials. But, apparently, that was never a serious consideration among the non-interventionist free market cheerleaders at the Federal Reserve. They saw their job as simply enabling their obscenely rich constituents to get even richer while putting the public at risk. Now it has all ended badly.





(Note; "Bernankerupted" invented by Mish blogger named skeptic)

[Hugin]

39. Today's Market Melody: A request, "Mister Sandman"...

Dedicated to the JPMorgan/Fed 'rescue' of Bear Stearns...

"Mister Sandman"

(pat ballard)

Mister sandman, bring me a dream
Make him the cutest that Ive ever seen
Give him two lips like roses and clover
Then tell him that his lonesome nights are over

Sandman, Im so alone
Dont have nobody to call my own
Please turn on your magic beam
Mister sandman, bring me a dream

Mister sandman, bring me a dream
Make him the cutest that Ive ever seen
Give him the word that Im not a rover
Then tell him that his lonesome nights are over

Sandman, Im so alone
Dont have nobody to call my own
Please turn on your magic beam
Mister sandman, bring me a dream

Mister sandman, bring us a dream
Give him a pair of eyes with a come hither gleam
Give him a lonely heart like pagliacci
And lots of wavy hair like liberace

Mister sandman, someone to hold
Would be so peachy before were too old
So please turn on your magic beam
Mister sandman, bring us
Please, please, please
Mister sandman, bring us a dream.

[Demeter]

46. Sung By the Andrews Sisters in the Previous Depression, I Believe

How appropriate--and then revived in the 50's by the Chordettes, another time of great despair. The three Eisenhower recessions--we three kids were born in them.

[UpInArms]

29. Households face the unthinkable: budgeting

http://www.reuters.com/article/bondsNews/idUSN1161618720080318?sp=true

ATLANTA (Reuters) - After years of living large, U.S. households are finally learning what financial experts thought they never would: to live within their means.

Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.

"For many years people on Wall Street have refused to believe that American consumers could ever change their spending habits," said David Rosenberg, North American economist at Merrill Lynch. "But it's happening."

"Frugality is in, extravagance is out," he added.

Consumer spending accounts for 70 percent of the U.S. economy and, according to Rosenberg, 30 percent of that is discretionary spending -- that is, buying stuff you can live without.

<snip>

"Your first priority will be your mortgage, then food, then utility bills then one family car if you need it for work," he said, standing at a lectern and counting off those priorities on his fingers. "Everywhere else we're going to cut spending because your lender won't make a deal with you if they think you have money to spare for luxury items."

...more...

[Demeter]

31. This Is Exactly Why I Divorced

My ex always spent each dollar twice. With a severely disabled child, this was more than dangerous.

[Hugin]

40. I always pinch each penny twice...

I'm just that way.

No kidding... Very dangerous to live on the edge with a child who's very dependent. :/

[Warpy]

73. People used to tell me that I pinched pennies so hard

they could hear Lincoln complain about it.

Good thing, too, since I ended up having to live on my savings for a few years.

Having Depression era parents plus an experience of homelessness and hunger in my youth taught me well.

Undoubtedly all the profligate yuppies will learn, too, but it's not going to be easy for them.

[Viva_La_Revolution]

55. nice to see some people waking up

too bad things have to get so bad for them before they do.

[fasttense]

85. Perhaps if CEOs and our government

would consider budgeting, we wouldn't be in this mess.

If CEOs weren't so greedy that they took the increase of US worker productivity to line their own pockets, then the con man's mark, I mean the American consumer, wouldn't have had to borrow.

If our government hadn't cut taxes and started an overpriced war, then a simple increase in social spending would have taken care of the problem.

But no, it's so much easier to point the finger at the con man's victim and continue doing what caused this mess in the first place.

[Demeter]

30. "US losing confidence vote as investors flee"

http://www.nakedcapitalism.com/2008/03/us-losing-confidence-vote-as-investors.html

The title of this article (provided by the page editors of the Telegraph) is a tad more sensationalistic than it need to be, but the basic observation holds: the Fed has gone so far in debasing the dollar that it is starting to see serious pushback from foreign investors.

This is a serious matter. The US runs a massive current account deficit which has until recently been uncomplainingly funded by nice foreigners who for the most part have bought Treasuries. But as Brad Setser has noted, starting with Treasury International Capital reports last year (August in particular was a shocker) private demand overseas for our securities has pretty much evaporated, making our continued high consumption levels dependent on the cooperation of central banks in China, Japan, and the Gulf states.

Worse, those countries (save Japan, which is still studying the issue) are increasingly deploying their foreign exchange reserves via sovereign wealth funds. Their return targets are higher, which means the cost of capital will go up as they take a greater and greater share of surplus recycling.

But no SWF is keen on the US right now, particularly with so many high profile Wall Street deals turning rapidly into turkeys (and that's before you allow for the FX losses, Eeek). Requests from the financial community for more dough are being rebuffed.

And remember, the people in charge have much more reputational risk than institutional investors, who are under pressure to beat benchmarks. These players, by contrast, are loss averse. The US going into recession and the dollar falling each would be reason to avoid accumulating US assets right now; the two in combination makes the decision a no-brainer. And these investors are pretty certain to be conservative, meaning for the most part they won't look at opportunities till a bottom has clearly been reached.

The author of the piece, Ambrose Evans-Pritchard, goes further and argues that a deflationary scenario is likely and that commodity prices (ex agriculture) will go into retreat in the not-too-distant future. This is plausible. First, the Fed's actions so far have been ineffective, and worse, they have produced unintended, counterproductive outcomes.

Bernanke has assumed that the US can create as much liquidity as it needs to in order to prevent deflation. But he's presupposed that America can act in isolation. Our huge current account deficit means there are limits to how far we can go with the printing press operation, and we seem to be breeching them now.

In addition, Bernanke has commented approvingly on the Fed's success in reflating in 1933 and 1934. Huh? That was AFTER the banking system had imploded and deposit insurance (the FDIC) was implemented in 1933. That example does not establish that Fed action earlier in the post-1929 crisis would have produced different outcomes (the real question is would monetary easing have prevented bank failures that led to the collapse of money supply). Similarly, many economists argue that had the Japanese cut interest rates faster, they could have prevented their deflation. But even if true (and I've heard others who were there at the time argue that the utter incompetence of the Japanese banks and the inability of the authorities to shut them down was at least as big a culprit), Japan had a very high savings rate, which meant it could deal with its crisis internally. We don't have that luxury.

Moreover, monetary easing will be ineffective if cash hoarding becomes common. Banks are hoarding liquidity; that's what the Fed has been trying to combat, with only intermittent and short-lived success. And worse, I am hearing tales of individuals starting to hold large cash reserves. It may just be that I have an unrepresentative sample, but let's hope this does not become a trend.



From the Telegraph:


As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.

It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.

Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.

The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.

With the "financial accelerator" kicking into top gear - downwards - we may need everything that Ben Bernanke can offer.

"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."

Even monetary policy à l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.

"It is like fighting a virus with antibiotics," he said.

We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.

But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.

Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.

It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.

I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.

Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.

The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.

John Hussman, who is no where as negative about outlook as Evans-Prichard (he thinks we will have a "typical," meaning 30% fall in average stock prices) also has doubts about the intermediate-term prospect for commodities:

Finally, on the commodities front, the CRB (a broad index of commodities prices) has hit fresh highs in recent days, but Friday's weak employment report has spurred questions about the sustainability of the runup in commodities. If you look at long-term commodity charts, you'll quickly become convinced of one thing – commodity prices are cyclical. They don't necessarily overlap economic cycles, but it is dangerous to believe that the cyclical dynamics of commodities prices have been forever changed by China and India. The price levels may very well be higher in the future than they were in the past, but cyclicality is something that should be expected in both commodities and the stock prices of companies that produce them.

It is accurate intuition that commodities are generally stronger in economic expansions than they are in contractions, but that intuition can fail when U.S. real interest rates are negative. At those times, the heavy downward pressure on the U.S. dollar tends to be supportive for commodities. Given that commodities have already had an extremely strong run, it would be overly speculative to take positions here on the expectation that the run will continue, but the evidence suggests that we should expect a serious break only when the rate of inflation breaks.

As a simple way to capture the pattern, we can define the economy as “strong” or “weak” depending on whether the ISM Purchasing Managers Index is above or below 50. We can capture real interest rate pressures by noting whether the latest year-over-year CPI inflation rate is above or below the 10-year Treasury yield. This is not a true “real” interest rate measure, but it generally captures periods where recent inflation is high or accelerating and bond yields are not particularly supportive of the U.S. dollar. Using the recent CPI inflation rate (overall, not core) also introduces a “trend following” component, since rising food and energy prices will push up that year-over-year rate as well.

Most of the past half-century has been associated with an ISM above 50 and a CPI inflation rate below the 10-year Treasury yield. During these periods, the CRB index has increased at a modest average rate of about 4.3% annually. When the ISM has been below 50, with CPI inflation below 10-year Treasury yields, the CRB has declined at an average rate of -5.4% annually. So there is certainly evidence to suggest that commodity prices are vulnerable during periods of economic weakness.

When CPI inflation is running higher than 10-year Treasury yields, the pattern is different. This doesn't happen often, but the return differences are large enough to be statistically significant despite the small sample size. During these periods of downward real interest rate pressure, the CRB has advanced at an average rate of 10.0% annually when the ISM has been above 50, and 39.6% annually when the ISM has been below 50. This result has been largely due to downward pressure on the value of the U.S. dollar.

In short, my impression is that the commodities run, though increasingly extended and dangerous, may have a final push due to further weakness in the U.S. dollar. Most likely, as we approach the second half of 2008, rising credit problems will reduce monetary velocity enough to finally put a lid on the rate of inflation. At the point where the year-over-year CPI rate drops below 10-year Treasury yields, most of the damage to the U.S. dollar will likely have been done (even if the economy weakens further), and that's probably when commodities will become poor speculations.

[Demeter]

32. How the Prisoner's Dilemma and Unintended Consequences are Accelerating the Credit Crisis

http://www.nakedcapitalism.com/2008/03/how-prisoners-dilemma-and-unintended.html



These are two separate, but related threads: we are now seeing a lot of "every man for himself" behavior (liquidity hoarding is one of many examples) that seem rational (or at least defensible) on an individual basis, but are destructive to the financial system as a whole. The second is that, per Richard Bookstaber, our financial system is "tightly coupled" and in tightly coupled systems, risk reduction measures (which too often look at risks in isolation) will typically have the perverse effect of increasing risks. As he explained:


Tight coupling is a term I have borrowed from systems engineering. A tightly coupled process progresses from one stage to the next with no opportunity to intervene. If things are moving out of control, you can’t pull an emergency lever and stop the process while a committee convenes to analyze the situation. Examples of tightly coupled processes include a space shuttle launch, a nuclear power plant moving toward criticality and even something as prosaic as bread baking.

In financial markets tight coupling comes from the feedback between mechanistic trading, price changes and subsequent trading based on the price changes. The mechanistic trading can result from a computer-based program or contractual requirements to reduce leverage when things turn bad.

Eugene Linden, who has written extensively on animal behavior as well as markets, gave this observation:

The problem facing the credit markets right now is yet another iteration of the "prisoner's dilemma" from game theory, at least in the sense that participants know that if everybody takes the stance of "every man for himself" the markets will crater, but they also know that if they rush for the exits there's a chance that they will get out the door relatively unscathed. Studies of the problem suggest that the more anonymous the context, the more likely that players will adopt "every man for himself," and, of course there's nothing more anonymous than markets. Nature has a long time to work out solutions for problems, and it turns out that a number of animals have converged on the same optimal solution that game theorists have worked out. It's called "tit for tat," and it simply means that if someone extends trust to you reciprocate that trust, and if not, not. The best example comes from vampire bats. When a bat is short on blood it will call on a copain for a sip, and if its bat buddy does the right thing, then the thirsty bat will reciprocate at some point in the future when the tables are turned.


It is wonderfully perverse that vampire bats are more community-minded than Wall Street.

The problem now is, save perhaps within the dealer community itself, many players deal with each other on an anonymous, one-off, or transactional basis. So the opportunity to discipline bad behavior is diminished considerably (but ironically, one of the big factors behind Bears' demise was anger in the community that it had behaved badly both in the LTCM crisis by being the only firm called by the Fed who refused to participate, and its reluctance to shore up it failed hedge funds last June).

Now consider how this conspires with the second element, the perverse outcomes that result from trying to reduce risk in a tightly coupled system. We had written about these examples of efforts to fix the housing/credit crunch backfiring. I'll start with the first, which is that aggressive cuts at the short end of the yield curve initially did nothing to lower long-term rates, which are the basis for pricing most mortgages; the later cuts have steepened the curve, making matters worse.

Reader Lune came to similar observations independently and put them together well, so we'll continue with her list:

We've already seen the law of unintended consequences so far:

1) Congress raises conforming limits on Fannie/Freddie to help unfreeze the mortgage market. Result: agency spreads skyrocket, bringing down Bear and a host of hedge funds. Mortgage markets still remain frozen.

2) Fed opens TSLF to unfreeze mortgage market. Result: Carlyle goes bankrupt as people rapidly arbitrage the difference between holding MBS in firms that can and can't access the new credit facility. Mortgage markets remain frozen.

Now we have 3) Fed opens TSLF to broker-dealers. Given the track record of our esteemed Fed so far, I shudder to think what the unintended consequences of this one will be, and I'm disturbed that it's very likely that no one has thought about that while running around in a panic shooting from the hip at any shadow that comes up. Anyway, here's my speculation...

The Fed is already close to tapping its full balance sheet. The trigger for the collapse of the past few weeks has been the rise of agency spreads, which is the cause not the effect of all the implosions we've seen so far. So to stop the panic, the Fed would have to intervene in the agency market. But it's remaining reserves of ~$400bil is tiny compared to the amount of debt out there. Furthermore, even a full faith govt. guarantee is unlikely to stop the rise in premiums (witness Ginnie Mae debt, where spreads are increasing even with a govt. guarantee). This is partially because of panic, and partially because agency debt will have fundamentally different behavior when it includes all the extra debt Congress is talking about stuffing it with. So with that uncertainty and unpredictability, it's no wonder spreads are increasing.

As the spreads continue to claim more casualties, more firms will line up for funding (when do hedge funds get to drink directly from the punch bowl? At this rate, probably in a week or two), and the Fed, unable to say no, will have to start issuing treasuries to expand its balance sheet. Within a matter of a month or two, the Fed will find itself with a trillion or so dollars of impaired debt in a "repo" that can't ever be recalled (some because the counterparty's balance sheet is still too weak, others because the counterparty has gone BK). The ultimate casualty? The Fed itself, unable to lower interest rates below 0%, facing default on collateral on its hands, and counterparties (central banks) unwilling to trust the Fed to manage the dollar any longer.

Oh yeah, and mortgage markets will still be frozen.

And she continued later with another possible unintended result:

I'm wondering: if the demise of Carlyle and BSC was hastened because they were firms that couldn't access Fed money and thus were foreclosed by firms that could, what will happen Monday? I'm thinking hedge funds, unable to access the Fed directly, will be eaten alive by the IBs.

Why? Because I'm figuring they'll find it safer to shut down hedge funds, take their collateral and convert it into Treasuries, even at the usual Fed haircut, rather than deal with the prolonged uncertainty and volatility of working with their hedge fund clients for an orderly unwind of their positions.

When there was no choice but to choose option #2, plenty of IBs bent over backward to try to keep the hedgies afloat, lest the market collapse. But now, better to shut them down, stuff the Fed with the remaining crap, and sleep better at night knowing your collateral is now in Treasuries rather than illiquid and opaque hedge fund positions. Which IB out there wouldn't be willing to convert their whole CDS position into treasuries even at a 50% discount (especially since with a repo, if the CDSes don't default, you'll get them back at par when the storm has settled)?

Altogether plausible. Let's hope this is not what come to pass

[Demeter]

33. Wall Street fears for next Great Depression By Margareta Pagano, Business Editor Independent.co.uk

http://www.independent.co.uk/news/business/news/wall-street-fears-for-next-great-depression-796428.html


Wall Street is bracing itself for another week of roller-coaster trading after more than $300bn (£150bn) was wiped off the US equity markets on Friday following the emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.


One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed's emergency funding procedure was first used in the Depression and has rarely been used since.

A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow."

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: "We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it's a self-feeding disaster." Mr Taylor, who had been relatively optimistic, has turned bearish: "It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on."

Mr Taylor added that he expects a sharp downturn in the real UK economy as the public and companies stop borrowing. "We have never seen anything like this before. This is new territory for us. Liquidity is being pumped into the system but the banks are not taking any notice. This is all about confidence. The more the central banks do, the more the banks seem to ignore what's going on."

Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: "There will be more banks and hedge funds heading for collapse."

One of the problems facing the markets is that, despite the Fed's move last week to feed them another $200bn, the banks are still not lending to each other.

"This crisis is one of faith. We are going to see even more problems in the hedge funds as they face margin calls," said Mark O'Sullivan, director of dealing at Currencies Direct in London. "What we are waiting for now is for the Fed to cut interest rates again this week. But that's already been discounted by the market and is unlikely to help restore confidence."

Mr O'Sullivan added that the dollar's free-fall is set to continue and may need cuts in European interest rates to trim the euro's recent strength against the dollar. "But the ECB doesn't like cutting rates," he said.

On Europe, Mr Taylor said that while the German economy remains strong, others such as Italy's and Spain's are weakening. "You could see a scenario where the eurozone breaks up if economies continue to be so worried about inflation."

European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.

The Fed's plan will give 28 days of secured funding to Bear Stearns, which saw its value slashed over the week by more than a half to $3.7bn. JP Morgan will provide the funding, but the Fed will bear the risk if the loan is not repaid. Fed chairman, Ben Bernanke, who pumped $200bn of loans to cash-strapped institutions last week, said more would be available to help others in distress.

[Kolesar]

51. Well, I have been "in a total state of shock, aghast " since December 2000

I only did dollar cost averaged investments since then of biweekly 401k and annual IRA contributions.

Most of us out in the real world only make home purchasing or investment decisions every few years or every few months. The hyperbole in financial writing is astounding

[4dsc]

38. Citigroup announces layoff of 185 home equity sales workers

Interesting remarks here about home equity which has bankrolled this economic expansion.. Can anyone explain what they mean exactly by "home equity products are not saleable in the current market"...

The home mortgage division of Citigroup Inc. said Monday it is laying off 185 employees in the Des Moines area who worked in its home equity business.

“Because home equity products are not saleable in the current market, or likely to be in the foreseeable future, we are curtailing proactive marketing efforts that drive home equity loan volume,” said CitiMortgage spokesman Mark Rodgers.

He said the company is not exiting the home equity business but will focus more on supporting existing Citibank, corporate and Smith Barney customers.

http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20080317/BUSINESS/80317030/1029/BUSINESS

[Demeter]

42. I Expect They Are Thinking That All That Paper Equity Has Evaporated in the Housing Price Slump

A lot of people are finding they have no equity--the price drop has made their housing worth less than their existing mortgage.

While this is bad for people in financial binds and the geniunely unlucky (that includes anyone living in BushWorld), the insanely cautious and prudent ones who still have equity are even less likely to waste it!


And on the banker's side of the equation: they all want to make loans, "securitize" them, sell them off to investors like Carlyle and Bear Stearns, and take the proceeds of the sale to do more loans--wash, rinse, repeat in an endless cycle of debt formation and risk shedding.

But there are no buyers for their packaged time bombs, because the risk has become manifestly clear.

[Warpy]

75. No, they can no longer shop home loans around to

other institutions. They destroyed their own reputation by sloppy lending practices: accepting liar loans without proof of income, writing paper at teaser rates to people they knew could never afford it, and writing loans on properties no one ever went to inspect.

All the paper they're holding is 100% theirs, and those heady days of shopping loans to hedge funds to be laundered into structured investment vehicles are over.

That's what that means.

[InkAddict]

82. Yeh, that will fix things...lay off the workers...

skilled sales personnel...why not re-deploy them to sell other bank services, passbooks and CDs, not debt contracts...or at a teller window...or even as janitors...the workers lack of income and healthcare won't help right our economy...it fuels the churn and decimation of communities by which their own executive "fat cats" continue to gorge and bloat--they keep their spots and parachutes.

I hate to see lay-offs, whether one or thousands.

[Roland99]

43. 9:54am - Pass the Xanax/Oxycontin cocktail please.

Dow 12,171.38 +199.13
Nasdaq 2,216.84 +39.83
S&P 500 1,301.54 +24.94
10 YR 3.42% 0.11
Oil $107.95 $2.27
Gold $1,007.10 $4.50


Ahhh... thanks a mil.....

[formercia]

45. Expect some serious profit taking soon.....

The Mafia just can't resist an easy buck....

[w8liftinglady]

44. on CNBC-Fed Decision...are they going to lower the prime rate AGAIN?

..and if so-what will that do to the value of our dollar

[formercia]

47. Think of the positive side

MacDonalds Happy Meal toys will have Made in USA stamped on them.

[Demeter]

48. And Bush's Place in History Is Secure!

[formercia]

49. That's one way to get rid of Lead Paint.

Alchemy wins the day. Lead becomes a precious metal.

[dweller]

50. at least til Friday ...

seems to be the trend.

dp

[wordpix]

69. how about those who want to save for retirement or college without pouring all their $$$

into volatile stocks? If you want to earn even 5% on your money with a CD or money market, forget it. Banks are giving you next to nothing on those, and higher gas, heating and food prices eat away at what you do earn in interest.

[UpInArms]

53. Efficient Markets Can Value Assets. Ours Can't

http://www.smartmoney.com/invisiblehand/index.cfm?story=20080318-the-economy

...snipping to the real stuff...

Monday afternoon, Treasury Secretary Henry Paulson mumbled something about the deal being essential to the orderly functioning of our markets. These are not only efficient but are in fact "the envy of the world," Paulson said, and no foreigner was apparently on hand to contradict him.

In fact, the secretary couldn't be more wrong. When CNBC abandoned infomercials in favor of programming from its international affiliate on Sunday night, it merely confirmed that much of the world now holds Wall Street in about the same regard as a Nigerian email scam or an Albanian pyramid scheme. The anchors and guests with the funny accents were quick to note the dollar's decline and the general instability of the American financial system.

So while it's good that Washington has finally woken up to the historic financial crisis on its hands, it still hasn't confronted the ideological emergency. There's more at stake here than just next quarter's write-offs or next year's growth rate. Laissez-faire capitalism has run headlong into a massive credibility problem.

And it's really as simple as the difference between $84 and $2 per share. Efficient markets are those that can tell what something is worth. Ours can no longer make that claim, whether in regard to financial stocks or, by extension, about the much larger pool of private debt. The numbers Bear Stearns posted last year, the numbers it clung to until the bubble finally burst, proved in the end not to be worth the recycled paper they were printed on. Just like the mortgage debt that had been rated AAA but ended up at the bottom of the junk pile. Invest in America, where the numbers can be anything you want.

<snip>

In the end a financial system is only as good as the quality of life it underwrites. And on that basis ours was indeed long the envy of the world. More recently, not so much. First it wasted many fortunes on the creation of all those web sites no one wanted to visit and all that fiber no one needed. Then it misallocated even greater sums on the construction of surplus houses and the propagation of debt we can't afford. And now fans of the system's reputed efficiency argue that there's no point fighting the fire threatening to engulf the entire community. That would be risking a moral hazard, after all.

...more...

[Demeter]

54. As crisis deepens, Fed steps up role By Ron Scherer

http://news.yahoo.com/s/csm/20080318/ts_csm/aconfidence;_ylt=AnypvIZBsZhbdQqyleEuDe6s0NUE


VERY FLATTERING TAKE ON THE SITUATION--NOT SURE I BELIEVE IT, THOUGH!---DEMETER



New York - In the wake of the collapse of Bear Stearns, a top investment bank, the Federal Reserve is struggling to reestablish confidence in America's financial system.

The US central bank is guaranteeing loans, taking questionable loans off the books of banks, and dropping interest rates at a near-record pace. Despite the Fed's efforts, the credit markets remain wary. Most economists agree that the Fed has now moved from crisis prevention to crisis management, trying to limit any cascading effect from problems on Wall Street.

"This is like nothing I have ever seen before in 50 years of looking at the economy," says Lyle Gramley, a former Fed governor. "We are in a very serious situation."

To try to limit the damage to the US financial system, the Fed is expected to drop interest rates by another three-quarters of a percentage point on Tuesday. Over the weekend, it lowered the discount rate, the rate it charges banks to borrow directly from the Fed, by one-quarter of a percentage point.

"The Fed is doing what it must to keep a meltdown in the financial markets from generating a meltdown in the economy," says Mr. Gramley, now a consulting economist at Stanford Group in Washington. "They are being very innovative and aggressive."

One of Gramley's concerns is that banks will continue to tighten their lending despite the easing by the Fed. This could spill over to Main Street in the form of yet more foreclosures. In addition, home prices would continue to decline.

No question, the Fed is dealing with some daunting challenges in the financial markets. Last week, lenders began to question the financial underpinnings of Bear Stearns, which borrows heavily to finance its operations. Even though Bear Stearns had $14 billion in cash on hand, it was not enough to keep the company afloat. Instead, JPMorgan Chase has agreed to buy Bear Stearns for $2 a share, or about $236 million.

In an unusual move, the Fed has agreed to take on its own books some $30 billion in mortgage securities or other less-than-liquid assets held by Bear Stearns.

"The Fed is treating Bear Stearns like a failed bank," says David Wyss, chief economist at Standard & Poor's in New York. "They are trying to restore some kind of functioning to the financial markets."

The Fed is also trying to give securities firms some breathing room. Over the weekend, in an unprecedented move, it said securities dealers could borrow for up to six months, the same way commercial banks can borrow from the Fed.

Echoing savings-and-loans failures
The Fed's actions remind some analysts of the turbulent period in the 1980s and 1990s, when over 1,000 savings and loans failed and their assets were taken over by the Resolution Trust Co.

"It's not that far from the Resolution Trust situation," says Bob Eisenbeis, chief monetary economist at Cumberland Advisors in Vineland, N.J., and a former senior official at the Atlanta Fed. "Now it's the Federal Reserve putting the taxpayer on the hook."

President Bush, who has been opposed to taxpayer bailouts of individuals in danger of foreclosure, hailed the Fed's actions Monday. "We've taken strong decisive action," Mr. Bush said at the White House after meeting with Treasury Secretary Henry Paulson and other members of his economic team.

Some investors, however, questioned the rationale of the Fed taking some of Bear Stearns's assets off its books.

"When the Fed does this, it is sticking it to American savers or anyone with US currency," says Peter Schiff, president of Euro Pacific Capital in Darien, Conn. "There are more brokerage houses with problems, and the Fed is just monetizing this thing." Still, Bear Stearns's disappearance as an investment bank shook financial markets. After a day of seesaw trading, the Dow Jones Industrial Average closed up 21.16 points, to 11972.25.

The firm's meltdown makes investors nervous, says Bob McIntosh, chief economist at Eaton Vance in Boston. "Here is another firm that said two weeks ago they had no problems, and now they are gone," he says. "Credibility just does not exist: Nothing would surprise anyone."

If the Fed reduces interest rates by three-quarters of a percentage point Tuesday as expected, it will have lowered short-term interest rates by 3 full percentage points since last September. That would be the fastest seven-month reduction since 1981, when then-Fed Chairman Paul Volker lowered rates by 6 percentage points in that time period. "It's a pretty rapid decline but not unprecedented," says Bob Brusca of Fact & Opinion Economics in New York.

However, Gramley is concerned that the economy is not responding to the Fed's interest-rate moves. "In all recessions, you could be sure if the Fed hit the gas pedal, the economy would turn around," he says. "Since last September, the Fed has been stepping on the gas pedal, but credit is not more available, but less. The market is not up but down."

More home foreclosures?
The risk of the economy not responding to the Fed's stimulus is daunting, Gramley says. With banks continuing to tighten credit standards, he worries the housing market will sink further. "Foreclosures will continue to rise, and home prices will be further depressed, and since homes are the underlying collateral for many loans, the problem becomes worse," he says. "This will require innovative thinking."

In fact, some Fed watchers worry that more is being done for Bear Stearns than homeowners. "Of all the investment houses, Bear Stearns was the one most deserving of going under because of the subprime crisis, both for its ownership of a subprime lender and its work packaging those loans," e-mails Kurt Eggert, a law professor at the School of Law at Chapman University in Orange, Calif., and a former member of the Federal Reserve Board's Consumer Advisory Council. "The Feds are doing more to help Bear Stearns than the borrowers facing foreclosure because of Bear Stearns's actions."

[wordpix]

74. "it said securities dealers could borrow for up to six months"---borrowing from the Fed, i.e. US

who pay taxes to keep this ship afloat. And we have a $9 trillion deficit, thanks to BushCo. So that means Bear Stearns is being bailed out by China, Japan, Abu Dubai and Saudi Arabia?

[wordpix]

76. Plaza Watch: Bear Stearns Chairman [ Cayne] in for $25 million

http://www.observer.com/2008/plaza-watch-3

"James Cayne, the recently resigned chief (but still chairman) of Bear Stearns, has bought a $25.8 million condo at the Plaza, according to city records.

It's been a rough year for Mr. Cayne, who left the embattled firm under a haze of recrimination following the collapse of two of its hedge funds that resulted in a $700 billion third quarter writedown in 2007 and a federal investigation. Perhaps his new 14th-floor pad will cheer Mr. Cayne up."

To hell with the investors and those who lost and will lose their homes. This guy's got a cozy pad for a good night's sleep at the Plaza.

[donkeyotay]

133. Disgorge profits, a legal term sometimes applied to crooks and their ill-gotten gains,

but never mentioned in the current crises. I guess the biggest crime is that all this crime was legal?

[Demeter]

56. How close are we to a liquidity trap? Paul Krugman

http://krugman.blogs.nytimes.com/2008/03/17/how-close-are-we-to-a-liquidity-trap/


Here’s one way to think about the liquidity trap — a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt don’t do anything, because you’re just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there’s no incentive to lend out any increase in the monetary base, because the interest rate you get isn’t enough to make it worth bothering.

Normally it doesn’t matter which short-term interest rate you choose — the Fed funds rate, which Uncle Ben sets, is usually very close to the interest rates on US government debt. But right now we’re in a situation in which Treasury bills yield considerably less than the Fed funds rate; to at least some extent this may reflect banks’ nervousness about lending to each other, even in the overnight market. And to the extent that’s true, Treasuries — not Fed funds — are the interest rates to look at.

As of 10:38 this morning, the one-month Treasury rate was 0.57; the three-month rate was 0.825.
Are we there yet? Pretty close.

[Demeter]

57. If You're A Real Wonk: The Bear Stearns-JP Morgan Merger Document

http://lawprofessors.typepad.com/mergers/files/bsmerger_2.pdf

Don't ask me how I got to this, I don't know.

Don't ask me to read it, either--I'm only an engineer, not a bean counter!

[Demeter]

58. Loretta Napoleoni: Bear Stearns and Carlyle Debacles Are a "Modern-Day Greek Tragedy"

http://www.huffingtonpost.com/loretta-napoleoni/bear-stearns-and-carlyle-_b_92014.html



The collapse of Carlyle Capital and the temporary rescue of Bear Stearns may go down in history as the key events signaling the end of the 'roaring nineties' (which lasted into the 21st century), nearly two decades of easy money, cheap credit and soaring global debt. Exceptional events -- such as the Fed for the first time in 50 years throwing a monetary lifeline to a bank on the verge of bankruptcy -- constitute the choreography of the closing scenes of this financial catastrophe which so much resembles a modern-day Greek tragedy.

The victims, a hedge fund and a bank, systematically ignored the bad omens because they felt omnipotent. Only a few months ago, while the British government struggled to save Northern Rock, the London-based European chairman of Bear Stearns dismissed any future troubles linked to the sub-prime meltdown. The rescuers, the Federal Reserve and J.P. Morgan, are determined to perform against all odds, but unless a Deus ex Machina, which for the Greeks was an impossible, supernatural event, takes place, their efforts will be in vain. Even the chorus, i.e. the market, follows a well known script: in one moment howling for the unlucky fate of the actors, and in the next scheming against them...

The script for this modern tragedy is a masterpiece of the power of illusion in the hands of those who believe to be gods, Tom Wolfe's 'Masters of the Universe.' Carlyle Capital was indeed half human and half superhuman. An offspring of the Carlyle Group, the "club of the powerful", whose members include former prime ministers such as John Major, presidents of the United States, Bush senior, and the Arab super rich, among whom are the bin Laden family, the fund used its amazing connections at the highest political and financial levels to gather cheap credit. Giants of global finance, Citigroup, Deutsche Bank, Bear Stearns, Lehman Brothers and UBS, got into financial scrums to become Carlyle Capital's lenders at phenomenal and ridiculous conditions: for each dollar in assets held by the fund, they lent $31 more. Carlyle Capital's leverage, the ability to raise money in the world market, was simply unique. When it went down it had $ 22 billion outstanding debt against assets of about half a billion.

Almost $2 billion came from Bear Stearns, a major player in the mortgage-backed securities s secondary market linked to the booming housing market. Over the years, Carlyle Capital had built a portfolio exclusively of such stocks. On paper it was a match made in heaven -- or better, in the Olympus of global finance. Advised by the members of the 'club of the powerful', the fund had bought triple-A mortgage-backed securities, implicitly guaranteed by the US treasury, issued by Fannie Mae and Freddie Mac, two of the most reputable institutions in the metamorphosis of the US housing debt into a global asset. Within the sub-prime secondary market, these stocks were among the most secure. And this is the unexpected twist of this tragedy: that the first ones to fall are those who had invested in 'secure' mortgages.

The game lasted as long as the housing market boomed. Carlyle Capital borrowed money from Bear Stearns money to buy mortgage-backed securities and used their increasing value to keep borrowing more and more. It was a win-win game. Each time the interest rate went down, borrowing became cheaper and housing demand went up while property prices rose. On paper(remember we are talking about a house of cards here) both partners were making money because one held and the other funded purchases of homes that were rising in value. For a decade the deflationary policy of the Federal Reserve fuelled this mechanism. Hundreds of thousands of similar partnerships took place, creating a global web where every financial institution is linked to every other. Then one day the wheel of fortune turned, Americans could not meet their mortgage payments any longer. As prices of properties began to slide, paper assets of companies like Carlyle Capital and investment banks like Bear Stearns vanished. Inside the web of easy credit, people panicked and began calling on their loans. Carlyle Capital fell victim to its own lenders' demands for cashand Bear Stearns, one of Carlyle's lenders, may well share the same destiny for the same reason.

The last scene of this modern financial tragedy will be played out this week. Tickets are already on sale in the major financial centres, from Wall Street to the City of London. Book soon because we are expecting a full house!



Loretta Napoleoni is the author of the bestselling book Terry Inc.: Tracing the Money Behind Global Terrorism. She is an internationally recognized expert on money laundering and terror financing. Her current book is Rogue Economics: Capitalism's New Reality.

[Demeter]

59. Commodities: "The big fall is coming"

http://www.nakedcapitalism.com/2008/03/commodities-big-fall-is-coming.html

David Roche, who heads Independent Strategy, a London-based investment consultancy, argues today in the Financial Times tha the bull run in commodities is soon to come to an end.

A big factor in the outlook for commodities is whether you believe our credit crisis will lead to inflation or deflation. Bernanke's aggressive rate cuts and the dollar's swift fall made commodities look like a great haven. But with the failure of the Fed's moves to revive lending, the high odds of a deep recession that pulls down emerging economies, and worries about the financial system leading to liquidity hoarding, the prospects for commodities are far from compelling.

Indeed, Monday Paul Krugman worried that we are getting close to a liquidity trap. Michael Shedlock, in "Now Presenting: Deflation!" gives us this chart as evidence:



His commentary:


Are short term interest rates at 1.16% and falling indicative of stagflation? Certainly not.

SEE LINK FOR CHART

Note: That chart is from yesterday, today short term rates are 0.97%

Stagflation theories die on the vine with the above chart. It really is as simple as that. Interest rates are not supposed to fall in periods of stagflation.. However, short term rates at 1% or even .5% do not prove deflation either.

Nonetheless exceedingly low interest rates are what one would expect in deflation. Japan's Zero Interest Rate Policy (ZIRP) is the model for what to expect.

Note that Roche forecasts a sharp fall for oil and industrial metals, He does not give a target for agricultural commodities.

From the Financial Times:

Commodity prices are hitting new highs almost every day. There seems to be no limit to where prices can go. Well, get ready: the big fall is coming soon.

In the current turmoil, there has been a rush into commodities. The volume of funds escaping risky assets and their derivatives has been enough to cause bubble-like euphoria in commodity prices. With global equity market capitalisation almost 10 times the notional value of commodity derivatives, the rush to commodities by investors has been like squeezing a quart into a pint pot.

The speculative element in commodity markets has grown sharply; non-commercial trades now constitute more than half of all trading, with hedge funds the biggest movers into the market. And in 2007, global equity funds switched away from financials and real estate into commodities in a big way.

But that’s about to change. Global growth is declining fast. Recession will ensue and no region or asset class will be immune from its ravages. Contrary to received wisdom, economic decoupling is unlikely.

Early hopes that Europe might withstand the US downturn are foundering. The Federal Reserve is not alone in shaving 0.5 percentage points off its last forecast for 2008 growth. The European Commission has followed suit: it now expects expansion of 1.8 per cent this year.

Most measures of European business and consumer confidence are on the slide. Weakening housing markets will intensify pressure on consumers in the UK, Ireland and Spain, where mortgage approvals and housing starts are down sharply. And European export growth, once immune to the rise in the euro’s value, has ground to a halt.

This does not bode well for the globe’s two most important economic blocs nor for producers anywhere hoping for sustained strength in global demand. The 700m people in the US and western Europe account for 47 per cent of world gross domestic product and more than half of global private consumption growth. A consumer recession in the US and European Union will require an improbable 3-4 per cent rise in demand elsewhere if it is to be offset.

Chinese demand has been the principal driver of commodity price increases in recent years. During the past five years, China has accounted for 50-100 per cent of the marginal increase in global demand in a wide range of commodities.

Having been a modest consumer of various commodities as little as a decade ago, the country is now the world’s biggest net importer of an increasingly long list of metals. Thus its impact on the global supply/demand balance, and on pricing, has been dramatic.

But about half of the commodities that China consumes are really just used for processing into exports. Thus its demand for industrial metals and energy is linked intimately to the global consumption cycle. Indeed, since 2005, net exports have contributed more than two-thirds of China’s real GDP growth.

But economic overheating will force the authorities in Beijing to tackle domestic inflation pressures just as the country’s main export markets go into a tailspin.

Food prices are rising at an unsustainable 23 per cent year-on-year and even non-food inflation is accelerating. Wage costs are exploding. With inflation at a 12-year high, the People’s Bank of China finds itself presiding over a negative real prime lending rate, excessive money supply growth and a trade-weighted exchange rate that is weaker than it was 10 years ago.

Something is going to have to give. To get a grip on inflation, China’s monetary policy will have to be tightened further. Growth will be the fall guy. Already export growth is taking a tumble as global demand drops off.

Where does this leave commodities? Along with slowing global growth, we estimate that a 3 per cent point drop in China’s growth rate, from 11 per cent to 8 per cent, would remove the ex-ante global supply/demand deficit from energy markets and push most industrial metals, including steel and copper, into significant surplus.

On that basis, we can expect the price for refined oil to fall 30 per cent and industrial metals by 20-30 per cent. The big fall is coming.

[Viva_La_Revolution]

71. I don't think this will apply to food commodities.

climate change is already wreaking havoc in many parts of the world, prices may level off but I don't see them dropping much at all.

[wordpix]

78. I dont' think oil will fall much, either

[Viva_La_Revolution]

80. May 2009 futures are down today over $3

but the futures till then are all up today. I think you're right.

[TalkingDog]

No but a food commodities bubble will do exactly what a housing bubble has

The prices will be artificially inflated to the point where the system becomes locked up because buying futures does not mean you will buy the concrete thing....

So the prices become inflated to the point where mfg.s can't buy product to make their food stuffs.

Or they have to raise their prices to the point where consumers can't afford to buy and the mfg.s crash and burn.....

Either way, people go hungry.


And yes, eventually, prices will come down. If nobody can or will buy, they have no other choice.

[Demeter]

110. Hard to Say

Once ethanol boom collapses, there ought to be plenty of food. The question is, how many people will die before that?

[Warpy]

88. He's right

The big money guys went out of the stock market last August because they knew institutional investors would be having to sell off real assets and started shoving everything into the commodities markets: oil, metals, foodstuffs. There is now a self sustaining bubble as ordinary folks see the prices shooting up and up and want in on the action. The big money has pulled out and the peasants are going to be left holding the bag, as usual.

[Demeter]

107. The Logical Follow Up Question: Where Did the Big Guys Go Next?

[Warpy]

111. Beats the hell out of me

because you just never know until the not so big guys jump in and create the real bubble.

[Demeter]

114. I'm Guessing Gold

because of the IMF sale, which has mysteriously fallen off the radar, and the sudden spike.

[Demeter]

60. Fed Watch: Anything and Everything is On The Table BY Tim Duy

http://economistsview.typepad.com/economistsview/2008/03/fed-watch-anyth.html

The collapse of Bear Sterns begins a new stage for the financial crisis. As is well known at this point, the Fed has effectively opened the discount window to securities dealers, cut the discount rate 25bp, and provided $30 billion in financing to support the J.P. Morgan buyout of Bear Sterns, taking shaky assets as collateral. Market participants have moved beyond the expectations for a 50bp rate cut tomorrow to 75bp or even a full 100bp cut today. At this point, it is impossible to rule anything out, although the safe bet is on the more aggressive side...Sunday’s moves are likely a precursor to a more aggressive Fed policy to take on more failing mortgage backed securities as collateral. There is of course a risk that the Fed will take losses on such assets, and thus the taxpayer will take a loss. What I think most likely is that the Fed and Treasury will come to an understanding by which such losses would be monetized. Do not forget the advice that Fed Chairman Ben Bernanke gave to the Japanese in 2003:

My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt--so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.

I myself see my differences between the US and Japan situations, but the necessity of a bank bailout is almost certainly similar. And someone will have to pay for it; monetization might seem like the least painful choice. And the Fed may ultimately conclude that the easiest way to reduce the household debt burden is to inflate it away. Thinking that outright monetization and high inflation may become the best policy choice reveals my grim mood tonight.

But a more immediate question comes to mind – why just a 25bp cut in the discount rate? Do any of us believe that is a meaningful policy action? To be sure, the expanded discount window borrowing is significant, as is the loan to J.P. Morgan. But it seems silly to cut the discount rate a meager 25bp on Sunday only to deliver a massive cut in the fed funds rate Monday morning.

I can think of two answers.

The first is that the Fed believed their non-discount rate actions would bring a quick halt to the global financial panic that was sure to ensue once the world realized a small but venerable US investment bank was worth just $2 a share. They were once again hoping that a seemingly bold action would put an end to the panic. Moreover, they are probably still stinging from criticism that their 75bp emergency cut in January was engineered to prop up equity markets.

Even if that strategy works, however, it works in part because market participants are expecting a full 100bp cut in the fed funds rate as a follow up. If you don’t deliver that cut, the market would collapse on Tuesday, completely undoing the Sunday policy initiatives. Moreover, as of 9:00pm Pacific Time, the Fed’s efforts to stop a global panic are failing, with Asian markets and the Dollar in free fall. So it looks like the Fed will have to deliver more policy easing Monday after all. Why not just have an emergency FOMC teleconference and get it over with Sunday?

The answer would be my second possible reason for the meager discount rate cut: Growing concern that an aggressive Fed easing at this point will trigger a Dollar collapse. The Wall Street Journal’s Greg Ip suggested this weekend that future policy must take into account the Greenback:

As the Federal Reserve meets for a crucial meeting Tuesday, more than just the credit markets are weighing on its decision: In recent weeks, the dollar also has joined its worry list. But it isn't clear whether that argues in favor of a smaller or larger cut in interest rates….

Up to a point, a lower dollar helps the Fed because it boosts exports at a time when consumers are under siege and business investment could be weakening. That is as long as there is no disorderly decline. But if the dollar feeds an impression the Fed is complacent and pushes up expected inflation, it could limit the Fed's ability to cut rates to support the economy…

As for interest-rate policy, Mr. Truman said that on the one hand, it might nudge the Fed toward a smaller rather than larger cut to show concern about the dollar. But, he said, it isn't that simple. If that meant the Fed took inadequate action against the credit crunch, the economy could ultimately end up far weaker, requiring lower interest rates and a far weaker dollar. "The Europeans are busy complaining about dollar weakness, do they want the Federal Reserve to ignore the U.S. economy in the name of supporting the dollar? The answer is also no."

Ted Truman hits the central point – policy may soon be dangerously close to the having to choose between a collapse of the Dollar and a more generalized banking crisis. Another description of this tradeoff comes from Fed Chairman Ben Bernanke in a 1995 paper, The Macroeconomics of the Great Depression: A Comparative Approach:

A particularly destabilizing aspect of this process was the tendency of fears about the soundness of banks and expectations of exchange-rate devaluation to reinforce each other (Bernanke and James 1991; Temin 1993). An element that the two types of crises had in common was the so-called "hot money," short-term deposits held by foreigners in domestic banks. On one hand, expectations of devaluation induced outflows of the hot-money deposits (as well as flight by domestic depositors), which threatened to trigger general bank runs. On the other hand, a fall in confidence in a domestic banking system (arising, for example, from the failure of a major bank) often led to a flight of short-term capital from the country, draining international reserves and threatening convertibility. Other than abandoning the parity altogether, central banks could do little in the face of combined banking and exchange-rate crises, as the former seemed to demand easy money policies while the latter required monetary tightening.

To be sure, Bernanke is describing the Fed’s tradeoff during the Great Depression, when it was constrained by gold standard. Still, the basic problem remains. Tight policy would accelerate and intensify the pain in the banking system, but loose policy could destabilize the Dollar, causing capital to flee the US and also undermining the banking system. And, to make matters worse, a collapse in the banking system due to tight money could then trigger a currency collapse.

I think it is safe to describe this as a no-win situation, which means an ugly choice has to be made. And, with this in mind, perhaps the Fed only offered 25bp on the discount rate in hopes they could avoid a greater than 25bp cut in the Fed Funds rates. At this point, that does not look like an acceptable domestic policy choice, and if they ultimate cut 50bp or more, they have accepted the risk of destabilizing the Dollar.

I have to imagine that global central banks are ready to intervene at the drop of a hat, and would not be surprised by some action when New York opens Monday. If there is an intervention, it will be interesting to see if the Fed participates. Could the Fed credibly buy the Dollar one day while cutting rates 75bp or more the next? And what are the odds of a successful intervention if the monetization option looks increasingly viable in the weeks ahead?

There is nothing but tough policy questions at this juncture. We can only hope that Yves Smith’s contact is misinformed:

The Fed is badly out of its depth. Not that this is a surprise, since its actions have looked desperate for a while (was it Barry Ritholtz who said "75 is the new 25"?). This confirmation comes from a hedgie reader:

A last note on the Fed. A friend who’s got very good contacts told me today that they’re completely at sea here, not understanding what’s going on, flying by the seat of their pants, and making policy completely on an ad hoc basis. Not precisely what one would hope for in this situation.

Bottom Line: An aggressive cut in the Fed Funds rate seems likely, with 100bp certainly on the table. Still, one has to ponder why this was not part of the Sunday policy package. Could it really be as simple as not being able to contact enough FOMC members to have a teleconference? Or was it hope that a bigger than 25bp Fed Funds rate cut might not actually be necessary? Or has the Fed come to believe that their policy actions might trigger a destabilizing fall in the Dollar? At this point, I anticipate a cut larger than 50bp, with even odds on 75 and 100. The greater the cut, the more the Fed is willing to risk a Dollar collapse.

[Demeter]

61. Systemic Risk From an Outsized Fannie and Freddie?

http://www.nakedcapitalism.com/2008/03/systemic-risk-from-outsized-fannie-and.html

People never learn, as John Dizard reminds us via "Forget the past and you make the same mistakes again" in the Financial Times.

Quite a few policy makers have talked up plans to use Fannie Mae and Freddie Mac as central agents in salvaging the US housing market, typically by refinancing stressed borrowers, The markets reacted badly to that, driving up the GSEs' spreads over Treasuries, but no one is getting the message, despite the fact that the Fed launched the Term Securities Lending Facility primarily to address the problem of gaping mortgage spreads.




Yet the Wall Street Journal tells us the powers that be want to push forward nevertheless:


The Bush administration, in an effort to stabilize the housing market, is preparing two new initiatives aimed at creating more funding for mortgages by relaxing constraints on Fannie Mae, Freddie Mac and the Federal Housing Administration.

Both efforts are in advanced planning stages, though neither has received final approval.

The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, is close to reducing -- but not eliminating -- an excess-capital requirement for the government-sponsored entities, people familiar with the matter said. This would give the companies more flexibility to buy and securitize loans. That, in turn, would allow the companies to play a bigger role in helping the housing market regain its footing.

Fannie Mae and Freddie Mac would both be expected to raise more capital, providing more of a shock absorber against potential losses....

Separately, officials at the Department of Housing and Urban Development have talked recently with the White House's Office of Management and Budget about a proposal to allow more people to qualify for mortgages insured by the FHA....

So far, HUD's efforts to insure more mortgages have had a limited impact, mainly because it is hard for financially distressed homeowners to qualify



Lovely. The borrowers don't qualify for FHA's well tested standards. Note that FHA paper is insured by Ginnie Mae, which makes it a full faith and credit obligation of the government.

Dizard points out that there are other reasons to be leery of making Fannie and Freddie any bigger: their size alone led to market distortions before the accounting scandals curtailed their growth. Dizard anticipates new ways in which their massive financial operations are likely to cause big-time trouble, since In the past, their risk control process created systemic risk for the debt markets. Dizard explains why he think it will create an even bigger mess this time around




From the Financial Times:

The institutional memory of governments and the financial industry now has the lifespan of a fruit fly. In the past, the lessons of history have been forgotten because a generation of managers and policy people retired, taking with them their essential historical experience.

Thanks to modern management techniques and high technology, though, we can now achieve near- complete amnesia in a year or two.

In the case of the US government sponsored enterprises, the biggest of which are Fannie Mae and Freddie Mac, for example, we are now about to get into the same mess we only crawled out of about three years ago. This time, though, given the present run of bad luck and fast-forwarding of the markets, a GSE-driven crisis could come a lot faster.

At the beginning of this decade, derivative risk management geeks, interest rate swaps traders and central bank econometricians filled up entire server farms with what-ifs on the balance-sheet hedging activities of the GSEs. The essential problem was that the GSEs were balancing ever-larger portfolios of fixed-rate mortgages on tiny equity bases. Fortunately, as we all knew, the credit risks of those portfolios were limited because homeowners rarely default on their mortgages. But that still left very large interest rate risks.

The core problem for the housing GSEs is, and has been, the prepayment option embedded in US fixed-rate mortgages. That has meant that the term of the GSE assets extends or contracts depending on whether homeowners can refinance at an advantageous rate. However, most of the long-term debt on the liability side of the GSE balance sheets has a fixed term. So the GSEs must more or less continually offset this imbalance between the average maturity of their assets and liabilities through the derivatives market, specifically the interest rate swap market. Otherwise the mark-to-market losses would overwhelm their small equity bases.

This process of risk control on the part of the GSEs creates systemic risk for the fixed-income markets. GSE hedging tends to be pro-cyclical. As interest rates rise, the average term of the GSEs' assets extends, since homeowners are not refinancing. As rates fall, the average term contracts, as homeowners prepay the mortgages on the GSE books. So the hedging activities tend to accentuate market moves. As rates rise and bond prices fall the GSEs are, in effect, selling fixed-income derivatives into a falling market. As long as the derivatives books are small relative to the size of the market, that is not a big problem. When the GSE derivatives books got big, that was a problem.

By 2001 Fannie and Freddie together had more than 10 per cent of the total market in dollar-based interest rate derivatives. That concentration of risk was worrisome for the central banks. As we wrote at the time, they were concerned that the banks and brokers who were the counterparties for the GSEs would need back-up for these commitments from the Federal Reserve Board. Worse, from the point of view of the Fed, and Alan Greenspan in particular, the GSEs' management had financial incentives to continue to expand their books of business. They had the political clout, since expanding the number of homeowners had strong support across party lines in Congress.

Then Mr Greenspan, the GSE regulators and their geeky allies got lucky. A management compensation scandal broke at the GSEs that quickly turned into a more general accounting scandal. The reformers had the political wind at their back, and as the accountants and lawyers sifted through the books, the portfolio growth reversed. Even better from a systemic stability point of view, the GSEs' share of the interest rate derivatives markets dropped by more than two-thirds by 2005. As homeowners took on more adjustable rate mortgages, they assumed some of the rate risk the GSEs shed.

Unfortunately, the squeezed balloon of mortgage credit just bulged out elsewhere. The GSEs, and the rest of the financial markets, assumed more credit risk, and they are now incurring those very real losses.



This recent history seems to have been forgotten by the government and the financial institutions. The caps on GSE portfolio growth have been lifted, and Congress and the markets are now asking them to take on the mortgage assets that everyone else wants to sell. Hank Paulson, Treasury secretary, has strongly suggested they prepare for this by raising capital. Freddie Mac's chief executive has already said he does not want to.

If this balance sheet growth does happen, the GSEs will be back to assuming the same rate risks that were so alarming four or five years ago, only bigger. And they will be attempting to hedge their rate risks using counterparties that are far more capital constrained than before.

I believe it more likely that before we get to that point again, the GSEs will be formally nationalised. The Bush administration is just kicking the can a little further down the road. These "public-private" mutants will simply become public agencies. There is no way to raise the equity capital for them to remain halfway in the private sector. In any event, the foreign central banks and related institutions have made clear to the US government that it will be held responsible for the GSEs' debt.

[Demeter]

63. Fed's Strategy to Halt Debt Meltdown is Not Working

http://seekingalpha.com/article/68917-fed-s-strategy-to-halt-debt-meltdown-is-not-working?source=feed


In yet another attempt to to halt the global debt meltdown now in progress, the Fed Lowered the Discount Rate and Expanded Lending to Primary Dealers in an emergency weekend meeting.

In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent.

The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm...

"It is a serious extension of putting the Federal Reserve's balance sheet in harm's way," said Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington. "That's got to tell you the economy is in a pretty precarious state. We learned that Bear Stearns's balance sheet on close examination was worth a 10th of its market value," said Reinhart.

Yesterday's events are "nothing like the 1970s, which was about fighting inflation," said David M. Jones, a former New York Fed economist. "This is fighting a negative, self-reinforcing process" of sliding collateral values, tighter bank credit and weakening of economic conditions, he said.
Nothing Like The 70's

Nothing like the 70's is right. Here is proof.

Yield Curve As Of March 16, 2008





Are short term interest rates at 1.16% (and falling) indicative of stagflation? Certainly not. You can kiss stagflation theories goodbye on the basis of the above chart. Somehow the myth persists.

---------------------------------------------

Primary Dealer Credit Facility

Here is the Federal Reserve press release announcing the Primary Dealer Credit Facility.

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility . This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally.

The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral, including all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available.

The PDCF will remain in operation for a minimum period of six months and may be extended as conditions warrant to foster the functioning of financial markets.
Facility Failures

The TAF (Term Auction Facility) failed to restore liquidity.
The TSLF (Term Securities Lending Facility) failed to restore liquidity. See The Fed's Swap Meet for more on the TSLF.
The PDCF (Primary Dealer Credit Facility) will be the next "facility" to fail.

-----------------------------------------------------------------------------------------

Bear Stearns Implodes

The Fed's emergency weekend actions above are all part of a failing effort to contain the fallout from the demise of Bear Stearns. On Friday Bear Stearns was worth $30 a share. Sunday evening Bear Stearns was worth $2 a share as PUT Buyers Celebrate Bear Stearns' Demise.

However, to get JPMorgan to commit to the deal, the Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

The stated book value of Bear Stearns last Friday was $80 billion. My quick math shows the actual book value of Bear Stearns was as little as -$28 billion taking into account Fed guarantees. That should put some new meaning to the term "Marked To Market".

Think all that debt on the books of Lehman (LEH), Morgan Stanley (MS), Goldman Sachs (GS), Citigroup (C), Merrill Lynch (MER), Bank of America (BAC), etc., is worth what is claimed? Think again. More revaluations are coming.

[Tansy_Gold]

95. Okay, okay, I know this is a radical suggestion, but what would

happen if, you know, the government like changed its position on income taxes? Like, if it started to tax the really really rich, the hedge fund managers and the CEOs who get paid in "options" that don't have like any real cash value?

Wouldn't this like have some impact on the greed factor that, you know, makes people want to make like way more money than they could like ever spend in fourteen lifetimes? (Which is about as long as it would take most ordinary working people to pay off the debt this mess has put them into.)

I mean, wouldn't this like give the government more money to maybe like bail out the foreclosure-ees so they could stay in their homes and like maybe buy some furniture or something?

Naw, whatmIthinkin?


Tansy Gold

[DemocratInSoCal]

100. Pinko Commie

How dare you suggest raising taxes.

How do you think the poor folks, earning $150K/year, are going to feel?

Haven't you heard of trickle down economics? How do you expect a CEO earning $150 Million/year, to pay more taxes? Do you want them out on the streets begging, just to make ends meet?

[Tansy_Gold]

135. Seeing a former seven-figure CEO on the streets begging

would warm the cockles of my cold, commie, pinko heart.

Yes, that's exactly what I want to happen to them.


Tansy "Raise Them Taxes!" Gold

[Demeter]

109. The World Would End

No really, you think that these selfish, greedy pigs are going to sit still for that?

There was a reason for the Guillotine.

[Tansy_Gold]

138. Well, at least THEIR world would end.

Their world of greed and obscene luxury and fascist power.

But you're correct: they would never allow it to happen.


Tansy "Tricoteuse" Gold

[Ghost Dog]

64. Goldman, Lehman earnings fall but top views

NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc (LEH.N) on Tuesday reported lower quarterly profits but results for both investment banks topped forecasts, sending their shares soaring.

Though results didn't reflect this month's seizing of credit markets that caused last week's collapse of Bear Stearns Cos (BSC.N), they provided some relief to investors bloodied by mounting losses from mortgages and market illiquidity.

First-quarter profit declined 53 percent at Goldman, the largest Wall Street bank by market value, hurt by more than $2.5 billion of losses on loans and other assets, though it benefited from strong trading results.

At Lehman, Wall Street's fourth-largest bank, profit declined 57 percent as bond trading revenue plummeted, but improved results from merger advising cushioned the blow.

"Goldman's report was a good report and Lehman's was not the end of the world," said Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey.

Goldman shares were up $17.89, or 11.9 percent, at $168.91 while Lehman jumped $9.88, or 31.1 percent, to $41.63 in morning trade on the New York Stock Exchange. Lehman shares had been tumbling on worries it might be the next large investment bank to collapse.

/... http://news.yahoo.com/s/nm/20080318/bs_nm/banks_results_dc

[Jersey Devil]

84. Woohoo! The trip to Vegas is back on again!

and the wife's 401 at Lehman is out of the crapper (at least for now). Now for more gambling in Sin City!

[wordpix]

98. "Goldman's report was a good report and Lehman's was not the end of the world."

Wow, what a :sarcasm: fantastic report to base a 300 pt. rally on.

[Demeter]

65. Nouriel Roubini's Global EconoMonitor / A Generalized Run on the Shadow Financial System

http://www.rgemonitor.com/blog/roubini/249924

Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.


All these institutions look similar to banks because they are highly leveraged and borrow short and in liquid ways and invest or lend long and in illiquid ways. This shadow financial system is, like banks, subject not only to credit and market risk but also to rollover or liquidity risk, i.e. the risk deriving from having a large stock of short term liabilities (relative to liquid assets) that may not roll over if creditors decide to withdraw their credits to these institutions.


Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing – with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.


The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers – many of which are non banks – to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.


This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.


The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.

[Ghost Dog]

66. Wall St jumps as financials rebound

NEW YORK (Reuters) - Stocks jumped on Tuesday as stronger-than-expected earnings from Goldman Sachs Group Inc's (GS.N) and Lehman Brothers Holdings Inc (LEH.N) provided some reassurance about the ailing financial sector.

All three major indexes were up close to 2 percent.

/... http://news.yahoo.com/s/nm/20080318/bs_nm/markets_stocks_dc;_ylt=Al42DFZgUNts1K5C1Db4JsC573QA

[Viva_La_Revolution]

77. CNBC bobbleheads are ecstatic. Apparently things are all better now.

:eyes:

[w8liftinglady]

81. did you listen to the talk with JP Morgan head this morning?

He was aglow with good news about the Fed printing infinite money.One of the CNBC hosts kept trying to redirect him,but his mantra was intact-"we are exporting at record rates(because our dollar is worth nothing)..."the Fed will not allow banks to collapse..they will simply inject more money into system"

[wordpix]

91. "Fed will simply inject more money into system" - great thing to base our economy on

especially with our $9 trillion BushCo debt. :puke:

How about JOBS and invention and manufacture of good products related to renewable resource energy, recycled materials, pollution controls, and mass transportation? How about fixing the country's infrastructure? :shrug:

I passed a road crew recently on a back road in southern CT near the Gold Coast just north of NYC, and they were putting little patches where the entire road should have been resurfaced. Really, the road has been almost washed out there. But even on the Gold Coast of CT, state and local governments can't put $ into infrastructure. That's how "good" our economy is. :wtf:

[DemocratInSoCal]

97. Fixing The Country's Infrastructure?

Do you mean here, or Iraq & Afghanistan?

Because, if you don't fix the potholes over there, they're going to follow us over here.

[Hugin]

120. We will win... "The War on Potholes!"

:patriot:

How come none of the candidates are talking about this, hmm?

:7

[w8liftinglady]

79. So..Lehmann profit falls 57%..and their stocks soar?I am in a parallel universe

http://news.yahoo.com/i/749;_ylt=AlbtdYmbS1iyh23Iva1kgNyb.HQA

[Viva_La_Revolution]

83. yep. It didn't fall as much as expected, so everything is hunky-dorry.

crazy-making ain't it? :(

[Zynx]

90. Stocks have also fallen sharply after 100% rises in profits.

The news itself matters very little, as it should. Usually the stock has already priced in these sorts of things.

[Joanne98]

86. Hey Bear's up to 8$ today! It will probably go back up to 20$

[Zynx]

89. Expectations matter here.

Also, yesterday people priced in about a 30% chance of total failure. That basically evaporated today.

[Robbien]

87. Canada having problems with a whole class of debt; put under Bankruptcy protection

OTTAWA — A $32 billion segment of Canada’s debt market was placed under bankruptcy protection on Monday after a committee established to restructure the troubled debt missed a settlement deadline.

While last Friday was the deadline for restructuring the debt, Purdy Crawford, the chairman of the committee, called the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper, said the bankruptcy filing was not “a last-minute Hail Mary pass; it is a carefully considered structural step in our process.”

“It’s simply wrong to draw negative inferences from it,” Mr. Crawford, a prominent Toronto lawyer, said. “It is the best alternative to minimize harm and maximize recovery for all investors.”

http://www.nytimes.com/2008/03/18/business/worldbusiness/18bankrupt.html?ex=1363492800&en=27f9711d3695980f&ei=5088&partner=rssnyt&emc=rss

No problem, all is good. Move along.

[ozymandius]

93. update: markets ecstatic over socialized banking losses

1:44
Dow 12,266.63 Up 294.38 (2.46%)
Nasdaq 2,238.00 Up 60.99 (2.80%)
S&P 500 1,314.62 Up 38.02 (2.98%)
10-Yr Bond 3.386% Up 0.072
NYSE Volume 2,856,353,000
Nasdaq Volume 1,140,809,375

1:35 pm : The major indices continue to take out new highs. In the S&P 500, General Electric (GE 35.51, +1.18) and Exxon Mobil (XOM 87.62, +1.83) are leading the way. Amgen (AMGN 41.21, -1.87) and Newmont Mining (NEM 52.18, -1.20) are the main laggards.DJ30 +300.98 NASDAQ +61.65 SP500 +38.22 NASDAQ Dec/Adv/Vol 702/2115/1.11 bln NYSE Dec/Adv/Vol 354/2804/827 mln

1:00 pm : The Nasdaq and S&P 500 climb to fresh session highs. The Volatility Index is down 12%, meaning traders expect less up or down movements in the S&P 500 during the next 30 days.

The major European indices closed the session with gains of at least 3%. London's FTSE closed up 3.5% and France's CAC 40 posted a 3.4% gain. Both the FTSE and the CAC are underperforming the S&P 500 year-to date. The FTSE is down 13.2% and the CAC has slipped 18.4%, compared with the S&P 500's 10.6% slide.DJ30 +287.55 NASDAQ +56.81 SP500 +45.23 NASDAQ Dec/Adv/Vol 724/2088/979 mln NYSE Dec/Adv/Vol 378/2758/784 mln

12:30 pm : The major indices dip off their best levels, but continue to hold onto large gains in excess of 2%. The utilities sector (+0.6%) is underperforming on a relative basis and is the only sector to post a gain of less than 1%.

The Dow Jones Transportation Average, commonly considered a leading indicator, has climbed into positive territory for the year. The best performing stock is Overseas Shipholding Group (OSG 60.54, +4.14), which was upgraded to Buy from Sell at Citi.DJ30 +266.46 DJTA +2.9% NASDAQ +49.13 SP500 +33.59 NASDAQ Dec/Adv/Vol 745/2032/865 mln NYSE Dec/Adv/Vol 384/2733/703 mln

[ozymandius]

101. Financials surge ahead of expected Fed rate cut

NEW YORK (Reuters) - Stocks rallied on Tuesday ahead of an expected decision by the Federal Reserve to cut a benchmark interest rate as much as 1 percentage point.

Financial shares rose sharply as stronger-than-expected results from Goldman Sachs Group Inc (NYSE:GS - News) and Lehman Brothers Holdings Inc (NYSE:LEH - News) provided relief to investors battered by losses from mortgages and a global credit crunch.

The Standard & Poor's financial index (^GSPF - News) soared 6.4 percent. Shares of Goldman Sachs climbed 13.7 percent to $171.75 while Lehman Brothers surged 37.4 percent to $43.60.

Major U.S. housing finance sources Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) rose on expectations regulators will ease a restriction on capital, letting them increase lending to the weak housing sector.

http://biz.yahoo.com/rb/080318/markets_stocks.html?.v=12

[DemocratInSoCal]

94. The Tension Is Unbearable

Will they drop the rate by 1/2, 3/4 or 1%?

I'm Sooooooo Excited. The markets can hardly contain themselves.

Between Lehman's lower than expected collapse, the new Giveaways announced on Sunday, and the lowering of rates to 2%, I think the Fed clearly is going to save the economy, and probably keep us out of recession.

I am still hopeful that they can figure out a way to eventually drop rates Below 0%. You know, actually Pay people to take money from them.

Shhhhhhhh.......does anybody hear that? Sounds like helicopters overhead. I gotta go.

:sarcasm: Off

[wordpix]

99. bwahahaha: "figure out a way to eventually drop rates Below 0%"

that is really funny :rofl:

[wordpix]

96. Boeing protest says Air Force changed rules to favor Northrop/EADS team in $35B tanker award

http://www.cnbc.com/id/23692981/for/cnbc/

WASHINGTON - Boeing Co. said Air Force officials tilted the playing field in a $35 billion contract competition toward Northrop Grumman Corp. and European Aeronautic Defence and Space Co. to keep the two in the game.

In its formal protest of the air tanker award, released publicly Tuesday, Boeing said the Air Force "repeatedly made fundamental but often unstated changes to the bid requirements and evaluation process" to keep the Northrop Grumman/EADS proposal alive.

The release of the proposal is Boeing's latest public relations salvo in the tanker battle. Last week, the Chicago-based company filed its protest the Government Accountability Office to overturn the Air Force award. It has also enlisted several big lobbying firms, notably McBee Strategic Consulting LLC, Denny Miller Associates, Gephardt Group and Akin Gump Strauss Hauer & Feld LLP, to press its case.

Northrop Grumman's CEO also went on the offensive last week, warning that tossing the tanker award would undermine all government procurement and defending the Air Force's evenhanded review. more....

[DemocratInSoCal]

102. Mortgage Rates To Drop On Fed Move.......JUST KIDDING!!

http://www.cnbc.com/id/23690581

Even with a big cut in interest rates today, homeowners shouldn't hold their breath waiting for their mortgage rates to follow.

If recent history is any guide, the Federal Reserve's aggressive rate-cutting will have little or no effect on long-term loans to homeowners.

In fact, mortgage rates even have bounced up a bit following some Fed cuts since September 2007.

[DemocratInSoCal]

105. It's A 75 Basis Point Cut nt

[girl gone mad]

106. FOMC CUTS FEDERAL FUNDS RATE BY 75 BASIS POINTS TO 2.25%

http://www.marketwatch.com/news/story/treasurys-drop-after-fed-cuts/story.aspx?guid=%7BA5E0CA3C%2D0F1E%2D4B34%2DB7BE%2D6C0E0B62C00F%7D&tool=1&dist=bigcharts&

[Demeter]

115. Looks Like The Markets Are Unhappy

Down 177 points in what, 30 minutes?

[Hugin]

116. It's the traps...

set by the 'Shorts' yesterday.

*snap* *slam* *whap* *clack* *crunch* etc....

It'll even out about where it started today, that magic 12,100 PISL.

Ah, the wonders of modern automated trading.

It's highly absorbent of liquidity... Sort of like Spongebob, only on speed.

[Danascot]

117. Wall Street Pares Gains After Fed Decision

Poor babies wanted a full ponit drop instead of .75 and now they're taking their marbles and going home.

http://www.nytimes.com/2008/03/18/business/18cnd-stox.html?_r=1&hp&oref=slogin

[Ghost Dog]

122. Fed cuts key interest rates by 3/4 point

WASHINGTON (Reuters) - The Federal Reserve slashed a key U.S. interest rate by three-quarters of a percentage point on Tuesday, a substantial cut but smaller than many in financial markets had expected, as part of an effort to hold off a deep recession and financial meltdown.

The Fed's action, taken on an 8-2 vote of its policy committee, took the bellwether federal funds rate down to 2.25 percent, the lowest since February 2005. Financial markets had largely priced in a full point reduction.

"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the central bank said in a statement outlining its decision.

The Fed also said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to a further lowering of borrowing costs if needed.

However, two Fed officials dissented, preferring less-aggressive action. Still, most policy-makers seemed to be counting on inflation to subside, partly because they expect unemployment to rise.

"The committee expects inflation to moderate in coming quarters, reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization," the Fed said.

U.S. stock markets trimmed earlier gains on the smaller-than-expected rate cut, but were still up sharply. Prices for short-term government debt extended losses and the dollar pared earlier gains against the Japanese yen.

/... http://news.yahoo.com/s/nm/20080318/bs_nm/usa_fed_dc

[Hugin]

121. ~15:00 EDT: "Stocks clmb(sic) after smaller-than-expected cut"

Before you chew me out, that's the way it was spelled on the Headline.

:rofl:

Index Last Change % change
• DJIA 12292.03 +319.78 +2.67%
• NASDAQ 2243.42 +66.41 +3.05%
• S&P 500 1318.92 +42.32 +3.32%

[DemReadingDU]

124. Who pumped up the market over 400points!

What major investors sold shares in a big bank today?

Is another big bank getting ready to fail?

:shrug:

edit: Maybe Lehman?
volume - 142,920,697
price up 46%

http://finance.yahoo.com/q/bc?s=LEH&t=1d&l=on&z=m&q=l&c=

[ozymandius]

126. You know, it's not beyond the possible that discounted funds were used

to buy company stock and boost its price. In fact - stock buybacks happen all the time. This triggers a runup in price when common stock holders want cash for their paper.

[DemReadingDU]

127. There have been lots of Lehman rumors

Just 1 week ago, the market ramped up 400+ points, only to see Bear Stearns failed on Friday.

Today, markets again ramped up 400+ points. Seems too much of a coincidence.



:eyes:

[ashevillepolitics]

145. DIABETIC PATIENT WHO CAN NO LONGER REGULATE GLUCOSE

[Zynx]

123. I do not feel sorry for those who got burned shorting Lehman.

Short sellers are the lowest form of life. Nothing but vultures. The short community has been trying to cause runs on major financial institutions which is a phenomenon that hurts everyone and helps no one. I hope they choke to death on the 41% rally in Lehman today.

[RUMMYisFROSTED]

125. The Wall Street Reacharound.

:wow:

[ozymandius]

128. End of the day: we all knew this would happen. It happens every single, cotton-pickin' time

the Fed cuts rates. People go nuts in concert with the Federal Reserve. Guess what else will happen? The dollar gets killed with a candle stick in the parlor. Colonel Mustard pays an extra 6% of his take-home pay on those volatile food and energy prices.

Dow 12,392.66 Up 420.41 (3.51%)
Nasdaq 2,268.26 Up 91.25 (4.19%)
S&P 500 1,330.74 Up 54.14 (4.24%)
10-Yr Bond 3.4510% Up 0.1370
NYSE Volume 5,495,740,500
Nasdaq Volume 2,411,619,750

4:30 pm : What a difference a day makes.

On Monday the market was rattled by the news that Bear Stearns (BSC 5.91, +1.10) agreed to be acquired for $2 per share and the fear that other financial firms might face similar solvency issues that precipitated that fire sale.

On Tuesday those fears were cast aside following better than expected earnings reports from Goldman Sachs (GS 175.59, +24.57) and Lehman Bros. (LEH 46.49, +14.74) that produced reassurances from both firms regarding their liquidity position. The ensuing response led to a massive rally in the financial sector, which gained 8.5% on the day - its largest gain since March 2000 - and led all sectors in the broader market.

The broad-based nature of Tuesday's rally led to gains for all ten economic sectors, the lowest of which was a 1.8% jump in the defensive-oriented utilities sector. That is respectable in its own right, but it qualified as an underperformance in Tuesday's market where the S&P 500 advanced 4.2% - its biggest one-day percentage move since October 2002.

Aside from the aforementioned earnings reports, the FOMC decision served as the other major trading catalyst. The committee ultimately approved a 75 basis point cut in both the fed funds rate and the discount rate to 2.25% and 2.50%, respectively. It should be noted, however, that the vote on the fed funds rate carried dissents from Dallas Fed President Fisher and Philadelphia Fed President Plosser who were in favor of less aggressive action.

The major indices backpedalled some in the wake of the decision as many participants were expecting a cut of 100 basis points. The disappointment soon faded, though, and stocks were quick to regain their winning form.

Notably, the FOMC acknowledged that uncertainty about the inflation outlook has increased, yet it still holds the belief that inflation will moderate in coming quarters. In turn, it left the door open for more rate cuts, saying downside risks to growth remain and that it will act in a timely manner as needed to promote economic growth and price stability.

The bulk of today's gains, however, were achieved ahead of the FOMC decision. To wit, the Dow was up approximately 300 points just minutes ahead of the FOMC decision at 2:15 p.m. ET.

Joining the financial shares in a leadership position were the homebuilding stocks. They got a lift from a better than expected Housing Starts report for February and a measure of hope that conditions may be starting to ripen for improved housing demand with the Fed's actions and reports that the regulator for Fannie Mae (FNM 28.22, +6.01) and Freddie Mac (FRE 26.02, +5.40) may soon ease its excess capital requirement for the government sponsored enterprises in a bid to improve liquidity in the secondary mortgage market.

The Producer Price Index was the other economic release today. It carried mixed news with total PPI up 0.3% (consensus +0.4%) and core-PPI, which excludes food and energy, up 0.5% (consensus +0.2%). The market managed to look past the core-PPI number, however, since it followed a tamer reading on core inflation in the consumer price index.

Separately, the equity market rally sucked some life out of the Treasury market as the 10-year note fell more than a point, driving its yield up to 3.46%. The commodity-driven CRB Index jumped 1.9% while the dollar index increased 0.2% in response to the smaller than expected interest rate cut.DJ30 +420.41 NASDAQ +91.25 NQ100 +4.4% R2K +4.8% SP400 +4.0% SP500 +54.14 NASDAQ Dec/Adv/Vol 690/2296/2.40 bln NYSE Dec/Adv/Vol 341/2863/1.95 bln

[ozymandius]

129. Right on cue: (guess what?)

Oil rebounds on rate cut, stock rally

NEW YORK - Oil prices bounded higher Tuesday after the Federal Reserve cut interest rates three-quarters of a percentage point and a rally on Wall Street raised energy investors' hopes for the economy.

Retail gas prices, meanwhile, slipped slightly for the second day in a row, while diesel prices rose further above $4 a gallon.

Oil was already higher, drawing support from the stock market's gains, when the Fed said it was lowering its key federal funds rate as it tries to stave off a severe economic crisis. Many investors expected a full point cut, but the Fed indicated it was concerned about higher inflation even as it was trying to shore up the economy.

Light, sweet crude for April delivery rose $3.74 to settle at $109.42 a barrel on the New York Mercantile Exchange.

In the past several months, rate cuts have fed oil price rallies as investors have bought crude futures to hedge against inflation and the falling dollar. Also, oil futures are priced in dollars, which makes them cheaper for foreign investors as the greenback falls.

http://news.yahoo.com/s/ap/oil_prices

[girl gone mad]

130. Fear driving people right back into stocks.

Fear of being stuck with declining dollars and fear of missing out on a rally.

[feminazi]

131. lots of good links here today

i will be doing my required educational reading tonight, for sure.

thanks

[ozymandius]

132. Please consider this:

JP Morgan agreed to buy Bear Stearns for $2/share. Yet today Bear Stearns was trading at one point for $8/share. I'm scratching my scalp in wonder 'til it bleeds.

[Karenina]

136. Get 'em while they're hot!

:rofl:

[UpInArms]

137. Ozy, if this was a "done deal" how can Bear Stearns still be

trading - wouldn't this all have halted the sale of their stock as they were no longer a stand-alone viable corporation?

:headbleedingcauseithurts:

[wordpix]

141. pump and dump, mebbe

[Zynx]

143. There is considerable speculation as to legal obstacles that might get thrown up.

This is speculative activity only.

[Bushwick Bill]

134. Cokehead Kudlow actually kicked ass today.

Wow, the entire first half of his show was about all of the Wall Street welfare. He was flat out denouncing all of the intervention and supports a strong dollar. Nice work, Larry!

[ozone_man]

139. Perhaps the dollar is due for a turn around?

I took out a small long position today. I think gold has run it's course for now. We'll see.

Yes, Wall Street welfare is disgusting isn't it? Wouldn't it be nice if we really had free markets, but it seems that the FED is now in the business of buying up equities at the tax payers expense. The founders would all roll over in their graves.

[UpInArms]

140. word is there will be an intermeeting rate cut -

and that the rate will be 1.75% by June

:shrug:

have to wait and see what happens - methinks the dollar will be very cheap for a very long time.

[ozone_man]

142. The rates may go down to 0.875%

like in 2003. I think that's the effective limit. But when they're done, I think they're out of bullets. Deflation may win at that point.

Even now you don't see mortgage rates going down. I think the cheap credit for consumers is over, credit risks are too high for these banks to lend now. At some point deflation will win over inflation.