>
"The Federal Reserve’s
actions today may have been strongly influenced by Bear Stearns’
problem."

-Dick Bove, Punk Ziegel & Co.

Go figure: This morning’s announcement by the Fed seemed to be designed to help the
brokers and their fixed-income hedge fund clients who were struggling
– so said Brad Hintz, Bernstein Research covering the Financials. (we noted similar sentiment here)

He’s not the only one. Influential Bank/Broker analyst Dick Bove of Punk Ziegel (quoted above) specifically mentioned Beat Stearns (BSC) as the beneficiary of the Fed’s largesse.

According to Marketwatch: "Bear’s stock dropped 11% on Monday on concern that its borrowing costs
are rising. For a brokerage firm, which relies on steady access to
financing, such disruptions can restrain its businesses and leave it at
a disadvantage to financially stronger rivals."

Pretty wild stuff — $200 Billion in Fed lending against junk paper, to bail out one mid-size investment bank.

And the market’s reaction: Dow up 3.55% (417 points), Nasdaq +4% or more than 86 points, S&P500 up 3.7% or 47 points 

Ain’t Socialism grand?

>

Source:
Fed action may have targeted Bear Stearns   
Alistair Barr, MarketWatch
MarketWatch 3:57 p.m. EDT March 11, 2008
http://tinyurl.com/2m4nv5

Category: Credit, Derivatives, Federal Reserve, Markets, Short Selling

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

101 Responses to “Bove: Fed Rescue for Bear Stearns”

  1. Marcus Aurelius says:

    And the best thing is, we don’t have to pay for it!

  2. Mikael says:

    I think thats bit far fetched to think the Fed did this for Bear (or primarily for Bear). And if that was the case, you would expect Bear would be up the most today, yet it was barely up for the day…

  3. Jay Weinstein says:

    While I understand the bitterness of the bears [BR: ?!?] I really don’t think the Fed had much choice but to do something. The utter collapse of the agency mortgage bond market was simply too threatening to the entire system. I don’t think it was just Bear Stearns at all—I think it was a combination of Thornburg, Carlyle Capital, Bear Stearns, Citigroup et al, and all those mortgage REITS… Much longer and you could have been looking at over $100 billion of agency securities being tossed on the bonfire from margin calls.

    Does it prevent the inevitable? Probably not. But it buys some time for those entities that didn’t have much left…

    The equity rally is the same one we have seen about 50 times in the last 9 months. Since they can’t use saving AMBAC as an excuse any more, had to come up with something new…

  4. Diarmuid says:

    Man on the street gets burnt again while corporate America is shown the fire exit…..and people wonder why the richer get richer and the poor get poorer.

    Governments once warned about giving thrid world countries a helping hand whether it be part of our food mountains or financial support…..explain to me how this is any different?

  5. Max says:

    There are a lot of entities (hedge funds, primarily) that would be affected by a Bear Stern collapse. I believe this was done to keep them from seizing up.

  6. Patrick says:

    Anyone have volume figures for the US indexes and futures for the time period since the late rally this afternoon around 1? And breath/depth as well?

    I’m not interested in the day–just from the point where it looked like the markets were going to fade for the day.

  7. Lloyd says:

    Today’s rally sure cleared out a lot of shorts. Who knows where we go from here but part of the floor under the market has been removed. Interesting times.

  8. Ross says:

    I think jay has an excellent point. If the system seizes the implications for main street would be as dire as for wall st.

    It does tell you how very leveraged and fragile the system has become. The FED has by my calculation expended over a fourth of its capital so far. Maybe the question should be…..when does the FED run out of bullets.

  9. Estragon says:

    Guys

    I think we’re missing the “big picture” here.

    AAA RMBS isn’t, and never was, the issue. It’s the “good” 80% of the mortgage market. In order for it to be impaired, we’re saying the remaining bad and the ugly parts are toast. That’s 20% of a $7+ trillion market. To that ~1.5 trillion, you’d have to add in the carnage in credit cards, car loans, CMBS, etc. Do you seriously think the fed and/or congress would allow that to happen at this juncture?

    The real issue is the $1.5 trillion of real problem RMBS (plus collateral damage). Some fraction of that really is bad. At this point though, we don’t know the fraction, nor do we know who holds it or their ability to absorb the losses. If the fraction is significant (likely) and/or the holders are weak (also likely), it’s still gonna leave a mark.

  10. Estragon says:

    Ross,

    The fed doesn’t run out of bullets. Ever. They make the bullets magically out of thin air. They can’t run out. They could ruin the environment for generations making the bullets, but they can’t run out unless they choose to stop making them.

  11. Freakalex says:

    Barry – crybaby in chief.. Waaahh the market didn’t do what I wanted it too. Waaaaahhh

    That’s why they call it fighting the Fed buddy. This shit’s going to happen all year long.

    ~~~

    BR: Fighting the Fed? Another clueless git with a distorted sense of reality: Since the first rate cut on Sept. 18 of last year, through Monday’s close, the S&P 500 is down 16.2%. That makes this the worst performance for the market following a series of rate cuts since the 1950s, according to Standard & Poor’s research.

    Even after today’s 3% pop, fighting the Fed this cycle has been money. If you bought when the rate cutting cycle began, you got buried . . .

    ~~~

    PS: Come back when you learn some manners, boy.

  12. Lauren says:

    Barry,

    He has also said the following:

    “Punk Ziegel’s banking analyst Dick Bove shocked Wall Street Friday after he called Citigroup (C) the best buying opportunity he’s ever seen. Bove joined the crew to discuss his reasons. Bove said that Citigroup has the best franchise of any bank in the world, it has unit growth and margins are expanding, the market capitalization of Citigroup is almost equal to the bank’s revenues and it’s selling at an 8% discount to book value. He thinks the stock will trade to $55 in three years.”

  13. Pat G. says:

    ” And the market’s reaction: Dow up 3.55% (417 points),”

    Big deal. The Dow was up 255 pre-market because (Bloomberg) “The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed.” Why weekly or increase the amount when “Dealers held $139.7 billion in agency debt and $60.2 billion in mortgage bonds, according to the Fed.” Which is $200B. “Policy makers said they anticipated the so-called primary dealers will lend the Treasuries to other firms in return for cash.” Hasn’t this already been tried? And as to these auctions being sterile and not creating inflation; when these primary dealers loan money they charge a percentage. If they get 5% on a $500M loan they just generated $25K out of thin air (much like the FED does don’t you think)? According to Jim Sinclair, “What is occurring is THE MONETIZATION OF BANKRUPTCY. The predictable result of monetizing bankruptcy is a significant increase in inflation and a sharply lower dollar. The dress up is to prevent a stinging rebuff for the Federal Reserve paying a FARCE price for bankrupt derivative packages purely to keep the banks that are almost all on the edge solvent.” Why didn’t the FED just make outright purchases of mortgage securities as many have suggested? According to Bloomberg, “Fed officials said they want to increase liquidity and the regular functioning of markets, rather than determine appropriate prices for securities. Buying the home-loan debt directly would affect prices.” Really? Then why did, “FED Officials said they will discount the value of the assets submitted in exchange for Treasuries.” Well of course the FED will discount the assets AFTER they become the taxpayer’s property. God forbid the banks or mortgage lenders take the hit. Oh the other 167 points on the Dow today was an oversold bounce. Commodities hardly flinched so money didn’t come out of them and go into stocks. And another thing regarding the inflation-deflation debate; I’m a believer in the historical data not the conventional wisdom of the day.

    Got alot off my chest and feel much better!! Thanks, writing is good for the soul.

  14. JustinTheSkeptic says:

    4.1 trillion…what’s 200 billion going to fix? It might buy some time, but let’s face it we aint seen nothing yet!

  15. DC says:

    One word – delusional.

  16. Greedy Capitalistic Piggy says:

    I do not understand the analogy with socialism Barry.

    What should the greedy capitalistic pig get from the government in return for the hundreds of millions paid in taxes to the government?

  17. Matt says:

    It’s not socialism Barry in that socialism’s positive intent is to spread wealth around to everyone in the society, taking from productive winners and sharing with the losers (or less economically fortunate). This is helping the rich, perhaps taking from the less fortunate and giving it to the most fortunate. Not socialism at all!!!! Not sure what one would call it – Corruption, A Thiefdom, Anti-Social-ism? But history books will someday espouse the universally accepted principle: That the period from 2000 – 2008 was the most corrupt, dangerous, un-democratic and anti-capitalist period of American history.

  18. Paul Jones says:

    Can I be a billionaire aristocrat too?

    Or do you have to be chosen?

  19. Ross says:

    Jay,
    I know they make the bullets. That’s the problem.

    The little country bank I use is literally coining money. The lady who runs it (owns it) turned down 2.5x book recently. It’s a funny bank. They know their customers and have been known to talk a customer out of borrowing for cars, home improvements etc. Last year they wrote off $18,400 in losses. Talk about community service.

  20. IdahoSpud says:

    Might as well move to Europe. At least *their* socialism is right out in the open and everyone gets a small piece of it.

  21. thebigkill says:

    If only ProShares offered Ultra-Short Central Banks.

  22. St. Pauli Girl says:

    Paul Jones,

    Most of the billionaires on Forbes list are self-made billionaires and they did it without the government’s help. If they can do it, you can do it.

    “The less government we have, the better” – R.W. Emerson, 1844

  23. “Anti-Socialism.”

    That about sums it up.

  24. km4 says:

    Crony capitalism at its finest.

    Fallon Fails in Mission to “Put the Crazies Back in the Box”
    http://www.dailykos.com/story/2008/3/11/18358/0519/419/474514

    If the Idiot-in-Chief attacks Iran this will likely trigger the Derivatives ‘ticking bomb’ and the US economy will go into depression (not just a recession)

    Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen
    http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D%2D4796%2D4D0D%2DAC9E%2DD9124B59D436%7D

    In short, despite Buffett’s clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.

  25. Allan says:

    @ Mikael – It could have been worse for BSC.

    @ Jay – Very good points, but nothing is inevitable. Certainly, an excuse that applies to so many of our august financial institutions is better than how/whether ABK will get bailed out.

    @ Ross – If you’re right, inflation won’t be just a specter. Where did you get the numbers for your 1/4 capital deployed item?

  26. Winston Munn says:

    Estragon said, “AAA RMBS isn’t, and never was, the issue. It’s the “good” 80% of the mortgage market.”

    Estragon: How do you arrive at these conclusions? According to Barry’s post of a couple weekends ago, Greenlaw, Hatzius, Kashyap, and Shin in their paper said that 80% of subprime was in AAA pools.

    The key years were 2004, 2005, and 2006, in which 25%, 30% and 30% of all home mortgages were subprime. If one totals originations for those three years and multiplies times 80%, it seems a better idea would be gained of total subprime packaged as AAA.

    Am I missing sonething here?

  27. John Borchers says:

    The way I see it swapping treasuries for mortgage backed bonds just helps the insurers. I don’t see it helping banks because although it limits losses it does nothing for future profits.

  28. spencerh says:

    Not Socialism, Crony Capitalism. You know, that thing that Bubbles McGreenspan decried?

  29. Ross says:

    Allan,
    I got the figures from the Fed’s march 6th release. You can peruse the naked data on their website.

    It also shows that they have $11 billion in gold. I don’t know if it is marked to market but I suppose so and yes, inflation will beat our brains out.

  30. John Borchers says:

    There will be a point in the future where people are going to realize that housing isn’t the root cause of the problem; debt is.

    When fixing housing doesn’t fix the economy and the market puts 2 and 2 together it’s going to be interesting.

  31. Winston Munn says:

    Ross wrote, “Maybe the question should be…..when does the FED run out of bullets.”

    Ross, it will depend on how these maneuvers are financed. The reason the TAF auctions didn’t help the markets was the system open market account was being sold down to finance the TAF. So they were giving with the left hand and taking with the right hand – which is why the markets continued to drop. Primary dealers were the principle buyers of the treasuries being sold by the fed.

    Unless the Fed makes outright purchases, this new funding enterprise will have to be financed from somewhere – and the only source I can see that will help is direct purchases of treasuries to increase the open market account – a direct monetizing of $200 billion in treasuries.

    I see no other way to finance the operation.

    Seems the Fed has chosen inflation as its primary weapon.

  32. rickrude says:

    I love the US.
    Socialism for the financial sector… they can do no wrong, regardless of what risks they take.

    THe avg joe gets holding the bad while living under the cruel world of fake capitlism

  33. Matt says:

    John B, you are exactly right I believe. I think somewhere either academically or through practice/empirically contemporary Capitalism has convinced itself that debt is not only credible, but THE way that capitalism functions properly. We need a new way of looking at the way we manage our way of living. Unfortunately in order for people to grasp the reality of what you stated, I think a lot of pain is going to take place. We need to find a way back to a society that has net savings and net savings that is at least 10 percent. I don’t know when it became acceptable to be so far in debt – it really is insanity if you think about it.

  34. Patrick says:

    I’m glad to see others read Jim Sinclair.

    Anyway, this is how it’s going to work. Hell, this is how is HAS been working since August. The Fed decided months and months ago that they are going to sacrifice the dollar for the US markets, both debt and stock.

    I mean seriously, what other option is there? Did some of you not sense the pure fear the past few days on Wall Street? Haven’t you seen this Fear nearly 10 or 20 times now since August? Do you not find it odd that with such fear half of the news articles are quoting optimists who think that the worst is over? Do you not know denial when you see it?

    Just look at the tape–people are scared sh*tless. Do you really think the Fed, at a time of exploding inflation, deteriorating dollar, and uptick in the long bond would seriously consider pumping this kind of money into the system unless they were worried about a near complete collapse?

    They’re not worried about firm XYZ or even stock index XYZ. They’re worried about EVERYTHING because it has all come completely undone. The great Rocket Scientists of Economics are getting destroyed by BASIC math theorems developed during the 1930s (Alan Turing, Kurt Godel, Hilbert, undecidability, etc).

    As far as those of you who are long US stocks because you think the bottom is here or soon to be here: THAT IS NOT THE ISSUE. It is perfectly possible for the stock market to recover… a bit… it’s also possible that the stock market will move sideways for YEARS. Why would you go long now, trying to catch a falling knife, other than for a short-term trade? There are litterly 30+ markets that are guaranteed to post double digit growth, and, at a time of high inflation, sitting in stocks while trying to guess the bottom in US stocks just because that’s a popular topic is a LOSE-LOSE. Look at the Big Picture.

  35. Jack says:

    Common Barry,

    The Fed had to break the vicious cycle somehow and this was a clever way to do it. You should be praising Bernanke for his ingenuity, not bashing him. Moreover, the Fed can increase the amount if necessary in the future — brilliant. Look at the history, all major financial crises required an aggressive Fed action. They should have done it six months ago.

    Why are you so critical when the Fed actions go against your bearish plan? You have decided to bet against the Fed, so take it and swallow your bitter medicine now – and stop bashing our new maestro Ben Bernanke.

    ~~~

    BR: All Hail Ben Bernanke!

  36. Matt says:

    There are litterly 30+ markets that are guaranteed to post double digit growth, and, at a time of high inflation…

    Well, that’s why we are here reading this Forum – Want to share????

  37. JustinTheSkeptic says:

    I just don’t understand the “save the market at any cost,” mentality? Why not wait a few days, let the market washout, give it a true bottom and then try these psydo-bail-out schemes? Perhaps because they realize that their is nothing that can be done to bail-out this economy and we might do better by supporting the banks and our buddies, before the shit really hits the fan?

  38. Ross says:

    Winston,
    We again find ourselves in agreement. You are a pleasure to read. I write poorly and often have difficulty getting a point across.

    I too suspect they will monitize. Just like the 72-74 oil shock. We are a carbon based rock. Sometimes I wonder at the people who do not understand what is made with/from hydrocarbons. Everything from aspirin through plastics to asphalt. Price increases go through the system with a lag. No one wants to lose market share til their margins are squeezed.

    Time to hunker down, methinks. We’ve got incoming!

  39. JustinTheSkeptic says:

    Greedy Capitalist Pig…it works the same way in a socialist situation, only the greedy capitalistic pigs take on sheeps in wolves, clothing…..

  40. JustinTheSkeptic says:

    You know Barry it really comes down to the old, “opinions are like ass-holes, everybody has one…and then the shit hits the fan!

  41. Patrick says:

    There are litterly 30+ markets that are guaranteed to post double digit growth, and, at a time of high inflation…

    Well, that’s why we are here reading this Forum – Want to share????

    Well I was extrapolating 30 but yeah you’re talking…

    long gold
    short dollar
    long euro
    probably long yen
    short 30 year bond
    long energy
    long cotton
    long most agriculture
    long 90 day canadian bills
    long most metals
    short housing
    probably short credit default derivatives (well, long the widening spread i guess)

    follow that pattern and you could easily find plenty of markets that are either sure bets over the long term, sure bets in the short term, or likely good bets over the long term.

    pick one, research the hell out of it, and come to a conclusion. there are plenty of opportunities.

  42. scorpio says:

    28 day lending against crap conveniently gets the I-banks like BSC and LEH thru the end of quarter without meltdown, but it’s coming. unless the Fed wants to buy BSC outright from Mr Lewis at, say, $150/sh. which they may do. they’re that crazy. still, be out of the market after Nov 4. all bets will be off.

  43. Patrick says:

    and just to clarify: if you want to go long US stocks now, fine, do it. it’s not a stupid trade…

    but you had better not need that money for several (5-10) years because you’re taking a huge risk in the short term. between further downturns, a stagnating market, the loss of value due to inflation, or the loss of value relative to other markets… it’s one thing to be a huge institutional investor who will seriously impact the price of some of these markets if you were to dump $40 billion into them but… as an individual, why bother? it just doesn’t make sense.

  44. Transparent says:

    long gold – extremely overvalued
    short dollar – at least 25% undervalued
    long euro – euro is in a bubble
    probably long yen – maybe
    short 30 year bond – short most bonds
    long energy – overvalued, even T. Boon is shorting oil now
    long cotton – maybe
    long most agriculture – maybe, but not most
    long 90 day canadian bills – have no idea
    long most industrial metals – yes, yes, and yes
    short housing – no, it is time to start buying XHB (double or triple the money in 2-3 years)

  45. John Borchers says:

    I held EEV today and took a 14% pounding. EEM was up 7% today. Asian markets tonight are sitting about 2-4%. I think they know this Fed move doesn’t really help their profits or they’ll figure it out eventually. Normally Asians are pretty conservative and not as speculative as Americans. Heck our economy is still going to be weak.

    The houses they are saving are already freggin empty.

  46. Patrick says:

    long gold – extremely overvalued
    short dollar – at least 25% undervalued
    long euro – euro is in a bubble
    probably long yen – maybe
    short 30 year bond – short most bonds
    long energy – overvalued, even T. Boon is shorting oil now
    long cotton – maybe
    long most agriculture – maybe, but not most
    long 90 day canadian bills – have no idea
    long most industrial metals – yes, yes, and yes
    short housing – no, it is time to start buying XHB (double or triple the money in 2-3 years)

    gold, disagree, fundamentally.

    dollar, possible short term rally, long term still screwed

    euro, tied to the dollar

    energy, yes and Boone lost 15% this year so far. seems like he mis-timed the short-term instead of going for the long term which is still stupidly bullish IMO. not that I would buy oil right just… $150 seems a sure bet eventually. we haven’t even hit crisis level yet.

    housing, i dunno yet. the bottom still seems several months away if not december.

  47. JustinTheSkeptic says:

    Matt, that is a failed system, because of people like me who want to take advantage of your disavantage of discerning human nature!

  48. JustinTheSkeptic says:

    Matt, in reference to your socialism, “pie in the sky,” thought: that is a failed system, because of people like me who want to take advantage of your disadvantage of dicrning human nature. Perhaps we can talk to Putin; he understands?

  49. David says:

    For all the talk of financial crisis and turmoil, I don’t see it in our town, just high gas and food prices. Now the Fed’s must slow down on everything financial.

    “Wisely, and slow. They stumble that run fast.”
    William Shakespeare

  50. Transparent says:

    I have picked some XHBs during the January market panic hysteria bottom; so far, I am up by 25% (I am not selling).

    European economy is an export driven (a third to the US) and slowing more than the US (Italy, Spain, France, UK, etc)

    Projected 2008 Growth

    US – 1.8%
    EU – 1.6%
    JP – 1.5%

    I do not see the euro going any higher. In 2000, there was a joint intervention to save the euro from falling below $0.80. In 2008, there will be a joint intervention to prop up the dollar (knock down the euro).

    Gold is in a speculative bubble.

    Oil will hit $115 and that is it. (Many had shorted oil around $100, after it reached $105, many shorts were squeezed to cover, it will reach $115 but that is it. Finito La Comedia for the current oil run)

  51. Winston Munn says:

    Almost overlooked in today’s excitement was this little neocon trifecta.

    Within the last 24 hours, Spitzer has been disgraced, the market has popped 400+ points, and Admiral Fallon has resigned.

    I wonder if Dick Cheney was baptising his grandson while all this was occuring? What’s that music I hear? Sounds a lot like “Come Softly One”.

  52. Leisal says:

    Dissin’ socialism without a nod to the capitalism having run amok is a bit tilted. Seems like the issues run deeper than just Bear Stearns–though, they are likely the poster child. I don’t see this as socialism, but rather ensuring that the wheels do not fall off the carts of institutions that cannot be allowed to fail. I do not see BSC as falling into that category. Let them go by the way as did Drexel.

  53. Crim Jamer says:

    Normally Asians are pretty conservative and not as speculative as Americans.

    HELLO?!?!? Shanghai…up 1 gazillion percent before this pullback?? Nikkei Bubble, etc…

    G’Night John Boy

  54. Transparent says:

    BR: “Since the first rate cut on Sept. 18 of last year, through Monday’s close, the S&P 500 is down 16.2%. That makes this the worst performance for the market following a series of rate cuts since the 1950s, according to Standard & Poor’s research.”

    There is a 6-9 months lag. What you see now is the effects of the rates before the cuts, when they were 5.25% (just seven months ago, the rates were at 5.25%)

    If you want to see how the rate cuts helped the economy, you need to wait and see where the markets and the economy will be 6-9 months from now. (The effects from the first rate cut should be starting to kick in about now).

  55. John Borchers says:

    Asians are normally conservative. The chinese are wild people in their market. They’ll learn the lessons of the Korean and Japan market.

    The Fed rate lag is a myth. Why would rates always take about 6 months to work? That makes no sense.

    I think what people are really seeing is that recent recessions have been rather short so it appears the fed rate cuts work. The key word is appears.

    The Fed already changed the game today because it’s not working. I believe rate changes have never worked it’s just the public opion that it will work. Total physcology.

  56. nick power says:

    Look here’s the dealio. Dollar gonna appreciate maybe not longterm but its gonna bounce here. US equites have been trashed. Maybe not too much, but they are down. There is a lot of foreign dough looking for a home and they are thinking. Dollars gonna strengthen, what can I buy thats denominated in dollars and what has been trashed recently. Light bulb, US equities and real estate.

    This is whats gonna create the bottom very soon.

  57. I missed all of the chest-pounding bullish trolls!

    Gee, they’ve been gone for about 6 months now — wonder why that is?

    Down 16% since the Fed began cutting, lost 1,000 Dow points in 8 days — and a 3% rally is all it takes to get you going!

    Welcome back, gals!

  58. Transparent says:

    The equity markets underperformed because they were obsessed with the dysfunctional and irrational credit markets; hence, today’s Fed action.
    The equity markets will catch up fast — be patient before betting against the Fed and saying that the Fed cutting interest rates does not work. It is too early to make such conclusions.

    In addition, CAT announced today that they see and expect higher growth (maybe it is the first signs of lower interest rates kicking in).

    Moreover, we would be in a much worse situation if the Fed did not cut interest rates at all; therefore, one can say that lower interest rates worked. It is all subjective but historically lower interest rates have worked.

  59. Rich Shinnick says:

    Barry,

    And this all helps the American consumer how? I thought that 70% of the economy was the consumer? I thought consumers were hurting?

    Oh wait, I forgot, the idea is to enable the consumer to take on more debt. If we enable the banks to lend it to them, they will (as lemmings always do) fall in line and continue to borrow and spend and borrow and spend.

    It is nice that we have this credit crisis to throw $108 oil on to the second page. Oh wait, it is now on the third, err 4th page.

    Page 1 Spitzergate
    Page 2 Creditcrisisgate
    Page 3 Obama v. Clinton
    Page 4 $108 oil
    Page 39 War in Iraq

  60. John Borchers says:

    Pretty soon we in the US can drive our car to the mall and have to turn around. No money to buy anything we spent everything we had gettin there, LOL.

  61. Ross says:

    I think transparent is the FOZ in disguise..

    A short but true story and a lesson?

    Last month I bought a new frig and microwave for a rental property I’ve owned ffor many years. I bought them from Lowes and they promised free delivery. I went to pay and they added the $65 delivery charge and said I would receive my $65 as a rebate. They gave me 3 one foot long pieces of small print sales tape, told me to sign and send to the address listed. I did so.

    Today I received from Lowes a $65 visa debit card with a use it or lose it date of
    July 08. Bastards!

    But that got me thinking that the GOV stimulas package could have been more effective had they sent a $600 U.S. Treasury debit card to usins with an expiration date of say Sept. 08. Spend it or lose it!

    This tragedy is like reading Bunyan. I’m trying to figure out how we get across ‘the slough of despond.’

  62. auskalo says:

    Merrill Lynch: Recession to Be Worst Since 1970s

    Merrill Lynch economist David Rosenberg, one of the most bearish Wall Street economists, says to look past the 1990-91 recession as a guide to the current downturn. The key difference: the depth of home-price declines.

    Mr. Rosenberg says in a note to clients that the current downturn is hitting more broadly than the credit crunch and real estate meltdown in the 1990-91 recession, which lasted eight months (as did the mild 2001 contraction). Home prices today are falling in 85% of the country vs. 40% during that period, he notes.

    When prices hit bottom in 1992, the inventory of new and existing homes for sale was at 7 months of supply. Now it’s at 10 months’ supply “with no improvement in sight,” says Mr. Rosenberg, who was among the first economists to forecast a 2008 recession.

    He sees average prices nationwide dropping 20% to 30% more, on top of the 11% decline since the 2006 peak.
    The mid-1970s recession “not only saw a sharp and sustained rise in food and energy prices, as is the case today, but also saw a very similar consumer balance sheet squeeze from a simultaneous deflation in residential real estate and equity assets, which never happened in the 2001 recession, the 1990-91 recession or the recessions of the early 1980s for that matter,” he writes. “The last time we had more than one quarter of outright contraction in the value of both asset classes on the household balance sheet was in the 1973-75 recession.”

  63. John Borchers says:

    Asia is really happy tonight. They are pumping hard on CNBC. Most Asian markets just broke even for the last 5 days, LOL.

    Pretty funny considering:

    Canada, Austraila, US, Japan, Germany, and the UK are all showing signs of slowing.

    Hey maybe the Fed will lend the world money so we can have growth. Let’s just make a federal reserve of the world so we can prevent any negative business cycles.

  64. Simon says:

    Is it possible that the banks will not be able to pay their loans? They borrow more they have to pay interest. If they can afford to pay the interest and their operating costs out of income things are not all that bad yet right?

  65. Transparent says:

    Ross

    What is FOZ?

    Thanks

  66. John Borchers says:

    Basically, yes Simon. But some banks are already there. I see CFO’s starting to resign (Sovereign Bank). That’s not a good sign considering the times. We got banks being margin called and not being able to meet it.

    Most the banks took on 7-10% coupons they have to pay for these cash injections. Some like MER gave their investors a guarentee. For MER’s case if the share price goes below $48 they owe the investor more shares or other compensation. The coupons were mostly used to equalize balance sheet loses. The rest can be used to loan out but to make any profit you’d have to loan it out at a higher interest rate.

    No one wants high interest rate loans right now. The banks are killing each other to make loans. People with excellent credit, like me, are hammering the banks for lower rates. My credit card (if I use it) has a 10% interest rate. That makes it impossible for most banks to make any money on it with the high coupons.

    The fed has it wrong. There is plenty money to loan out. The people that want it don’t have good enough credit.

    Basically, people will excellent credit rarely need it.

  67. alexd says:

    “Checkmate. Something on your mind Sebastion?”

    Then follows the death of the maker at the hands of what he has wrought.

    Here’s a question. How about those above who have voiced a strong opinion, try to come up with a black swan scenerio for the situation they project. In other words what most unexpected event (well try to imagine one) would change the whole paradign of what you project. Then we can comment on this. It is sort of like Barry holding the chart upside down.

    I just read tha the number of people who have cracked into their 401k’s is rising dramaticly. To me that says there are many desparate people out there. It also fortells a rather difficult future. This is what unbalanced trade and a dramaticly falling dollar has wrought. The money has to come from some account. Yeah I know the fed is printing money which will soon be affordable to use as wallpaper, but that lasts only so long until people are reluctant to take your money. Then the bleeding accelerates.

    Also in the area of commodities esp agriculture tobacco stocks have that added twist of being addictive and tobacco use is growing in the emerging world. Probably a good idea to invest in the future medical needs of these smokers/market.

    Well yes, I do think that eating is also addictive.

    Bladerunner the final cut is finally coming to this part of the midwest!

    Well it said unknown. You can’t say you know how long the market will go down, but who does?

  68. UrbanDigs says:

    I dont buy into this rumor. The marketplaces themselves are not functioning, and Bear is seeing similar problems to many other firms due to this tough environment.

    The fed did what they could do without killing the dollar and bubbling up commodities. It was a solid move. Lets be honest, they had to do something and I will be very impressed if they restrict their FFR cuts as a result of this type of action as time goes on.

    Target the move, and let the process continue to play out without destruction taking place

  69. Graham P. Knopp says:

    Question – do paper equity losses in any way compensate for flooding the market with new liquidity? will losses offset currency devaluation at all?

    Thanks in advance!

    (and…FREE MARKET MY ARSE!)

  70. Stuart says:

    Denninger nailed it.

    “Let’s talk about reality.

    Reality is this:

    You short something it is to sell it to someone else. One of the ways the primary dealers make their money is by shorting Treasuries into the market, borrowing them from The Fed and then generating carry off the money.

    Over the last six months the primary dealers have borrowed an insane amount in Treasuries and are short in aggregate close to $100 billion of them!

    What’s worse, they’re long all the other debt instruments, lots of it involuntarily! Like, for example, LBO debt and mortgage securities they can’t sell into the market.

    So the primary dealers are short Treasuries, which are going up in price, and long everything else which is going straight in the toilet!

    THE PRIMARY DEALERS WERE CAUGHT IN A CREDIT MARKET SHORT SQUEEZE!

    You’ve seen it and might have had it happen to you. Been short home builders in the last few months when one of the “Quant” unwinds happens? You know what happens to the market for those stocks, right?

    The price rockets higher.

    Ok, what happens to treasuries when there is a huge demand? There is a similar rocket shot in price and down in yield.

    Now think about how badly it sucks to be you if you’re the idiot who packaged up all this crap debt and are watching it dwindling towards zero in value, while what you shorted in an attempt to earn carry is rocketing higher as everyone you sold your crap to is dumping it on the market and fleeing into what you’re short!

    So what really happened today?

    We were almost certainly on the verge of the collapse of one or more of the primary dealers AND international banks FOR THE SECOND TIME IN JUST A FEW DAYS!

    Remember, The Fed just took an “extraordinary” action in expanding the TAF!

    Their only defense the primary dealers had to being forced to buy back those treasuries at a huge loss is to borrow even more of them from The Fed.

    BUT THEY WERE OUT OF COLLATERAL TO POST OTHER THAN THESE MORTGAGE AND OTHER “AAA” BONDS!

    What’s worse, this short squeeze was being fed by people who did NOT want agency paper at any price; they were generating it by dumping the agencies and buying Ts. They have figured out that its contaminated (see below) and are freaking out about the potential for serious shortfalls or outright defaults.

    Remember – “AAA” means “as safe as the US Government.”

    Except that lately, we’ve learned that its not – that the claim is a lie.

    So The Fed decides that they’re going to put in place a “swap” and let the primaries exchange Treasuries (of which they have several hundred billion) for “Agency and other AAA” paper – mortgages. The intent is to “pair” the two, thereby halting the spread widening and thus stopping the short squeeze.

    The action today was nothing more or less than an attempt to stabilize Agency spreads which were blowing wide in a historic short squeeze that was threatening to collapse major financial institutions!

  71. Bengie says:

    Just you wait when Ben slashes interest rates next week. The bears are crazy to short and to fight the Fed a week before the meeting.

    ~~~

    BR Who is really short this market after an 8 day, 1,000 point drop?

    You know not what you speak of . . .

  72. John Borchers says:

    The Fed’s move today may have heavily damaged the investment banks as they may have been very short leveraged.

    Every time the Fed does something it screws up the progression and healing.

    Stick with the normal meetings so the markets can correct themselves by doing what they need to do!

    Banks must have been betting against their own bad stuff. Only they know how bad it is. Then the Fed screws it up again! LOL

  73. njdoc says:

    Please, don’t insult Marx and Lenin by calling our Fed’s behavior socialism. Socialism is supposed to be a utopian CLASSLESS society where there is no more greed. One could hardly call the Feds behavior classless. You could call it an Asset-Command economy, where the government tries to create price controls on assets instead of consumer goods. But this probably just your bread and butter unregulated crony capitalism where the fed is bailing out its most important customers. I just want to remark on the hypocricy of this administration. Not too long ago Hank Paulson stated in no uncertain terms that there will be no bailout of the “speculators”. This is a remarkable sleight of hand for as the real speculators are being bailed out, millions of Americans will get Laissez Fair therapy.

  74. AGG says:

    From an accounting perspective this problem of putting a price tag on equity cannot be resolved simply by having the Fed accept it as collateral . Sure , the margin calls are dealt with but the fact that the equity is losing marketability at it’s historical price has to show up on the corporation’s debt to equity ratio.
    Unless there is some master plan to increase wages massively, the rug will continue to be pulled out from under the banks and wall street.

  75. Aurora Borealis says:

    A couple of historical remarks.

    It seems that many commentators haven’t understand that all real life socialist ECONOMIC systems have been nothing else but state capitalism dictated by the elite. FED actions are nothing but instant planned economy.

    By the way, the Third Reich printed a lot of dollars and pounds during the WWII. They wanted to destroy their enemies’ economy with the help of true Weimar Republic inflation.

    But the didn’t have the Helicopters!

  76. Winston Munn says:

    Stuart,

    Lee Adler at The Wall Street Examiner came to the exact same conclusions.

    Along the way, there is also an attempt to divert the “flight to safety” in order to protect the primary dealers from further punishment on the treasury shorts.

    Taking this one step further, with FCBs being such a key players in treasury purchases, imagine the effects if many of these central banks cut back on treasurey purchases in a coordinated maneuver – prices would drop dramatically – and the banks would profit.

  77. jojo says:

    best comments i’ve seen on today’s strategery are:

    This….
    “The question is not about helping the banks. That is a given at this point.

    All the time we are subjected to the meme that
    (1)we have to save the system
    (2)it is difficult to engineer a rescue that punishes the crooks; the crooks get saved as a side-effect.

    This is pure hogwash.”

    AND
    this from Karl Denninger

    “The Truth is that The Fed did not inject one thin dime of anything into the market today and this had exactly nothing to do with Agency paper “directly”; it was nothing more or less than an attempt to halt a short squeeze that was threatening to destroy their Primary Dealers….

    The Truth is that The Fed pulled the pin on the next credit market grenade today and stuck it between its legs. It is now praying that it can hold the spoon tight and if EITHER long-bond yields rocketshot (that is, a “disorderly” unwind of people who are in them ensues) OR the spreads between them and agency paper blow further, the grenade will go off, destroying the basis in the swaps they engaged in today. In that circumstance either the primary dealers will be directly trashed or The Fed will have to throw them under the bus on purpose to avoid its own destruction.

    WHEN (not if) these truths become apparent to everyone else, don’t say you weren’t warned.

  78. Booyah! says:

    njdoc,

    It was not a bailout. It was like performing an appendectomy on a sick patient with gangrenous appendicitis. Now, the patient needs a few days of IV antibiotics (aka rate cuts) before the discharge home.

    Take care doc, and do not forget your daily ASA.

    Boyaah!

  79. Aurora Borealis says:

    Don’t forget, in all major financial crisis the ultimate provider of “liquidity” or “solvency” has been the taxpayer.

    The FED has started to gather the Junk to the Bank.

    There will be a Big Corpse which is then cut into pieces and shared by the Vultures. The Vultures are paid by the government by letting the Vultures to throw the rest of the Junk to the Bank.

    Finally the Junk Bank will be owned by the people of the USA.

    That’s why you need the FED.

  80. Stuart says:

    Now here’s an interesting thought. Given there’s a series of auctions until the full $200B is transacted, what happens if after any 28 day period following the host auction if the PD can’t pay back the Fed? The fed’s balance sheet is going to be stuck holding MBS in a falling real estate market which in turn is backing the currency.

  81. Stuart says:

    Winston, I like alot of Adler’s work. His piece on “crowding out” was spot on. I see it taking root everywhere.

  82. Via Aurelia says:

    I think the Fed will make money on this paper. The markets have greatly overreacted and the paper has been extremely undervalued. How do you value the paper when there is no market? You mark it to model, and some of the models assume 9% default rates when in reality the default rates are only 0.25%

    This is moneymaking deal for the Fed.

  83. Phil says:

    this guy nails it:

    Fed in a desperate race with the spectre of collapse

    By Damian Reece
    The Telegraph, London
    Wednesday, March 12, 2008

    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/12/ccom11

    Equity traders, being ever the optimists, decided to look on the bright side of yesterday’s central bank intervention. London and New York did a jig after the US Federal Reserve and Bank of England pulled out all the stops to avoid markets falling into a pit of despair.

    And who can blame them? When you’ve got state institutions as big as the Fed supporting markets then where’s the worry?

    The Fed, with its latest $200 billion offer of cheap cash, has provided yet more state aid for errant hedge funds and another Washington-backed bailout for Wall Street bankers. The Bank of England joined in again, further shedding any notion of being wary of moral hazard. But as the bail-outs are getting bigger, then clearly the problems causing them must be getting bigger.

    The Fed has saved the day again, but it will only be for a day or so. It was Friday, remember, when it had to pump $200 billion of cash into the system. Yesterday it was offering to lend a similar amount to try to soak up some of the toxic debt that has left the lending markets hamstrung. How much further can the central banks go to support a system that is so obviously broken?

    Arguably, having come this far, Mervyn King and Ben Bernanke have breached the point of no return. There is no going back. The US certainly is now relying on its central bank to keep its most important credit markets open and its equity markets from plunging and to bring a veneer of normality to financial life. Traditional supports, such as confidence in normal commercial debt repayment, have been knocked away as institutions are engaged in a desperate dash for cash.

    We have not seen anything like it since the decade of the Great Depression. Melodramatic as that might sound, it is a fact, but a fact that markets seem unwilling to accept.

    While the Fed is willing to slash rates and hope, and pump liquidity into the system, markets will remain optimistic. But it is a race to the bottom, the Fed hoping it reaches the finish line first and restores confidence returns before a bank goes bust. But the spectre of a collapse is neck and neck with Bernanke and it’s still anyone’s guess which will win.

  84. Via Aurelia says:

    Gee Phil, you are quoting The Telegraph, a London tabloid.

    Maybe you should try an American supermarket tabloid , The National Enquirer.

  85. SPECTRE of Deflation says:

    “Pretty wild stuff — $200 Billion in Fed lending against junk paper, to bail out one mid-size investment bank.”

    To be fair the junk paper is worth 53 – 84 depending on the vintage per the ABX, and could actually go up in value in the future rather than being permanently impaired. The goal is to unfreeze the markets, and damned if everyone but shorts didn’t like what they saw toady. Big volume, A/D way up as was New H/L. Hell, it may implode tommorow, but tonight I will tip my hat to Ben who may be more Wiley than we give him credit for. God knows he can use an occasional headwind after coming in behind Senile Al the Bubble Blower.

  86. Phil says:

    If it’s too much truth for you Via just keep it tuned to CNBS and the Wall Street Drivel

  87. muckdog says:

    No one believes the rally. Put-call is still way up there.

  88. Nolaguy says:

    Great comments – I’m learning a lot.

    When will the FED save me from a short squeeze on a bad investment?

    My QID got hammered today. Where’s Ben???

  89. roger says:

    This is all as predictable as the chorus of Feelings. The market will go up, it will go up, and then drift down to 12,000, then below, then the Fed will do some other completely stupid thing. The strategy was first applied by Xerxes. Here’s Herodotus:

    “They [the Persians] then began to build bridges across the Hellespont from Abydos to that headland between Sestus and Madytus, the Phoenicians building one of ropes made from flax, and the Egyptians building a second one out of papyrus. From Abydos to the opposite shore it is a distance of almost two-thirds of a mile. But no sooner had the strait been bridged than a great storm came on and cut apart and scattered all their work.

    Xerxes flew into a rage at this, and he commanded that the Hellespont be struck with three hundred strokes of the whip and that a pair of foot-chains be thrown into the sea. It’s even been said that he sent off a rank of branders (1) along with the rest to the Hellespont! He also commanded the scourgers to speak outlandish and arrogant words: “You hateful water, our master lays his judgement on you thus, for you have unjustly punished him even though he’s done you no wrong! Xerxes the king will pass over you, whether you wish it or not! It is fitting that no man offer you sacrifices, (2) for you’re a muddy and salty river!” In these ways he commanded that the sea be punished and also that the heads be severed from all those who directed the bridging of the Hellespont.”

    It is the old conflict of power and reality. The reality is that the Fed’s actions are on more of a string than they know – the inevitable sharp inflation that they are stoking is going to eventually cost Bernanke his head – figuratively speaking. And the Ponzi structure of debt is inevitably going to be painfully unwound. At the moment, the Fed is whipping the ocean in classic Xerxes fashion. The pointlessness of this will become a byword in ten years.

  90. Francois says:

    “Most of the billionaires on Forbes list are self-made billionaires and they did it without the government’s help.”

    BWAHAHAHAHAHA!! Reaaaaaally?

    And pray tell how do you know that? I have yet to meet one very successful person who plainly said: “I worked hard, but I also was lucky”

    Now, if you prefer to believe some billionaires’ self-promoting propaganda…there is no mandate in the Constitution that forces one to get out of ignorance.

    For basic education in the beauties of American Capitalism since 1980, please read “Free Lunch” “Perfectly Legal” and “Gotcha Capitalism” all available at your favorite bookstore.

    The ugly truth is that several billionaires have handsomely benefited (and still do) for the government largesses in more ways than one.

  91. BrantW says:

    Why is it that no one is talking about the fact that this is a sterilized intervention. No net credit added. The TAF is MUCH different than floating more RePos to add credit. Totally different.

    While I am a huge critic of the FEDs past actions, I have to say that this was the only thing they could do….and the right thing to do. You would do the same thing in their situation. The FED will do it again….but they will eventually run low on assets…and then their goose is cooked. Once their USTs are ‘sold out’ then they have no more assets to sterilize with.

    The reason the dollar did not tank tody was that this was a sterilized action they were committing to.

    Watch what happens if the FED….in two months…commits to buying crap paper and NOT sterilizing. Let me predict. Market rallies for a few hours. Dollar collapses 10% instantly. Long rates sky instantly. Equities realize that adding credit sometimes has a donwside….equities collapse. Economic apocalypse ensues.

    That is why the FED is sterilizing now, and will not take this sort of action without using the asset side of their balanc sheet.

  92. et alli. says:

    http://etalli.typepad.com/et_alli/2008/03/top-us-middle-e.html

    Top U.S. Middle East Commander Resigns Three Important Stories CENTCOM Commander Adm. William Fallon Resigns, Citing Magazine Article on Iran Policy Bove: Fed Rescue for Bear Stearns Government Reports Warn Planners on Sea-Rise Threat to U.S. Coasts Qu…

  93. Eric says:

    Gee km4, I hope “quadrillion” doesn’t become a household word anytime soon! In Europe, this will give new meaning to phrase like “betting on billiards”…

  94. Kp says:

    This financial system is akin to a vegetable on life support. Keeping it alive is an act of wasteful futility. Let it fail so we can wipe the slate clean and move on.

    Next we can move on to our government or lack their of. Some of us just want our lives back.

  95. wunsacon says:

    >> You mark it to model, and some of the models assume 9% default rates when in reality the default rates are only 0.25%
    >> This is moneymaking deal for the Fed.
    >> Posted by: Via Aurelia | Mar 11, 2008 11:42:24 PM

    Then…

    Why aren’t you buying it then?
    Why aren’t hedge funds buying it?
    Why isn’t anyone buying it?

    >> some of the models
    Which “some”? Is the “.25%” default rate the rate for the tranches that assumed “9%”? Is that “9%” the initial assumption when the debt was priced or is that the new, implicit rate?

  96. João Carlos says:

    I read all post, but no one talked about that Europe, England, Canada and Japan are making the same thing for save their banks.

    IMHO, if they are using their US treasuries, the dolar will fall.

  97. Michael schumacher says:

    Welcome to the United Socialist State’s of….

    Mexico

    2/10th’s of a trillion dollars just greased the skids for that to be completed.

    wait until Dick Cheney gets installed as VP to McCain’s “presidency”……

    We have now entered into a period of history that will be looked upon as the great downfall of whatever shred or perception of democracy we had left.

    absolute and utter disgust doesn’t being to describe how I feel at this point.

    Ciao
    MS

  98. wunsacon says:

    LOL!!

  99. X says:

    Barry,

    Please stop using the word socialism in this context, it is not! Socialism means a more just distribution of wealth, here you are talking about something much more ominous and subversive. The Fed is not transferring wealth from the more fortunate to the less, but in fact, it is doing the exact opposite. It is helping the rich at the expense of the poor.

    Please.