Con-tango

Fed acts as middleman

The Pied Piper of Hamelin.

I just read this Bloomberg article. To start with, it’s an interesting piece because people are hanging on it all sorts of Fed intentions —they’re even stating that the Fed has introduced a stealth lower target rate.

But, before I get too stranded away from reality, let me copy the relevant paragraph of what this new rate encompasses:

The Fed requires banks to keep a level of reserves at the
central bank. On those funds, the Fed will pay a higher rate
equal to the average target rate over a one or two-week period
less 0.10 percentage point. For excess reserves, the rate is the
lowest FOMC target over a period less 0.75 percentage point.    

The Fed said it would raise or lower the spread so the New
York Fed trading desk can keep the federal funds rate near policy
makers’ target “based on experience and in response to evolving
market conditions.”    

So, let me translate for you. If the Fed target rate is 2.0 %, the Fed will now pay a 1.9 % interest on bank reserves, and if banks want to further park their spare change at the Fed, they will only get a 1.25 % interest rate on these additional funds.

I don’t see where this could be a stealth target rate. The Fed is evidently increasing a tad the liquidity of the banks through the payment of the tiny 1.9 % interest rate payment on reserves. But, what I do see important, is that the Fed is opening a door, so banks may deposit with the Fed their extra cash, instead of hoarding it.

If banks follow the Fed’s pied piper, taking their deposits into the Fed, then the Fed —acting as the middleman— may lend these funds to other banks, to thaw the current bank seizure.

Smart thinking —I hope playing the flute works.

House passes bill

On the edge of the abyss, as French Prime Minister Fillon puts it, the House approves the bailout bill by an overwhelming vote of 263-171.

$1.25 Trillion out the Fed door

Brad Setser. Economist.

From Brad Setser’s blog I get the scoop that, at least, –there could be an extra $520 billion in swaps–, already, $1.25 Trillion USD have been pumped out from the Fed’s balance sheet to put back some liquidity to the banking system –or to cope with the silent worldwide run of the banks.

The stock market continues to bleed away and high short term rates persist in their seizure mode.

From this

The Standard & Poor’s 500 Index fell 46.78, or 4 percent, to
1,114.28. The Dow Jones Industrial Average declined 348.22, or
3.2 percent, to 10,482.85. The Nasdaq Composite Index slipped 4.5
percent to 1,976.72. Almost 14 stocks retreated for each that
rose on the New York Stock Exchange.    

The S&P 500 has slumped 24 percent this year as the subprime
mortgage crisis brought down banks including Lehman Brothers
Holdings Inc. and made borrowing more expensive. The index lost
8.1 percent over the past four days and is poised for its worst
weekly retreat since the markets reopened after the Sept. 11,
2001, terrorist attacks.    

and  this Bloomberg bailout concerns articles:

The two-year swap spread climbed to as high as 167.25 basis
points from 156.25 yesterday. It had widened to 166.38 basis
points on Sept. 24, the most since Bloomberg began compiling the
data in 1988. A basis point is 0.01 percentage point. The swap
spread, which is a gauge of credit concerns and partially driven
by expectations for the London interbank offered rate, or Libor,
is the premium charged over Treasury yields to exchange floating
for fixed-rate payments.    

I gather the market is pessimistic about the 12 votes needed to pass the bailout.

Roubini’s triage

Nouriel Roubini. Economist.

Roubini says the original plan was flawed, that it needs a triage approach:

• The government needs to determine fast which banks are distressed but solvent, and let
  the others go under, in order to avoid a run of the banks, since
  deposits (not covered by the FDIC) are leaving banks because their
  solvency is unknown.
• Then, recapitalize the surviving banks through the purchase of prefered stock,
• and reduce the mortgage debt, through an HLOC or similar agency, so debtors can stay in their homes and pay their mortage…

Hence, confidence to banks is reestablished.

If this is the traditional approach, why didn’t Paulson and Bernanke take these steps in the first place?

It could be that the new instruments make the determination of the solvency of the banks almost impossible. Roubini doesn’t think so.

1929

November 1929 headlines

I found this amazing piece,  Reactions of the Wall Street Slump, published by The Economist on their November 23, 1929 edition.

I chose the following paragraph that was written days after the month long collapse of the stock market, because it’s truly eerie:

How far this will extend must at present be a matter of conjecture. A
great deal must in any case depend upon the situation of the banks. The
one influence that could throne back the full brunt of the speculative
collapse upon industry and produce a real depression throughout the
country would be banking trouble. Certain Wall Street banks made some
spasmodic efforts to check the slump, but were careful to dispose of
their holdings at the first opportunity, and there is no reason to
suppose that they have seriously handicapped themselves by efforts
which never went the length of attempting to stop the rot by holding
large blocks of stock off the market. There are, however, known to be
large quantities of securities not yet absorbed by the public which for
the time being have to be carried by banks and finance houses. Many
banks will, moreover, have made very large bad debts, while others will
have to finance customers for a long or short period. Some bank
failures, no doubt, are also to be expected. In the circumstances will
the banks have any margin left for financing commercial and industrial
enterprises or will they not? The position of the banks is without
doubt the key to the situation, and what this is going to be cannot be
properly assessed until the dust has cleared away. On the whole, the
experts are agreed that there mint be some setback, but there is not
yet sufficient evidence to prove that it will be long or that it need
go to the length of producing a general industrial depression.

The lack of liquidity, compounded with fear, and the underlying problems like CDS, CDOs, subprime MDS, over indebtness at all levels (from credit cards to companies and government) gives me a light stomach, like when I’m looking down from the edge of an abyss.

Outline of Congress draft

From a Reuters factbox, I thought it would be a good idea to include here where the house bailout draft stands so far.

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Republican balls

Las Vegas
Courtesy of Iñigo Biain

Man, o’man, o’man, I’ve got to hand it to them, the some republicans have titanium balls, they started with a pretty large sum, $700 billion, but now, they’re asking you and me to take out of these clowns’ hands the potential risk of the whole $62 trillion insured debt (or credit default swaps).

As reported by Reuters:

On Thursday, a small group of conservative House Republicans —
including Texas’ Jeb Hensarling and Virginia’s Eric Cantor — offered
their own alternative to the Bush proposal. Focused on mortgage
insurance, the one-page alternative plan was presented to reporters at
a briefing.

The plan calls for the U.S. government to offer
insurance coverage for the roughly half of all mortgage-backed
securities that it does not already insure. The Treasury Department
would charge premiums to holders of the securities, under the plan.

Let me see,

• pay outright $700,000,000,000 or assume the risk of a debt default worth $62,000,000,000,000?
• or approximately $2,100, versus risking $186,000 for each one of the 300+ million US citizens.

Gee, when did Las Vegas take over the whole USA?

Continue reading…