Markets continue to be roiled by the upset of the effort to pass the touted Paulson bailout bill. As of this writing, the FTSE and Dj Stoxx 50 are up slightly, but money markets took a beating, the reaction worsened by end-of-quarter factors. From Bloomberg:
The cost of borrowing in dollars overnight surged the most on record after the U.S. Congress rejected a $700 billion bank rescue plan, heightening concern more institutions will fail.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans climbed to record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, advanced to a record. Rates in Asia also rose.
“The money markets have completely broken down, with no trading taking place at all,” said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. “There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.”….
The two-month Libor rose to 5.13 percent today, also a record. Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, from home loans to credit derivatives.
Funding constraints are being exacerbated as companies try to settle trades and buttress balance sheets over the quarter- end, balking at lending for more than a day…..
Futures on the Chicago Board of Trade show a 66 percent chance the Fed will trim its 2 percent federal funds target rate by 50 basis points in October, surging from zero percent a month ago. The odds of a quarter-point reduction are 34 percent….
The Libor-OIS spread, the difference between the three- month dollar rate and the overnight indexed swap rate, widened to 246 basis points, showing cash scarcity is at a record.
The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, was at 338 basis points today after breaching 350 basis points for the first time yesterday. The spread was at 110 basis points a month ago.
As of this writing, Brent crude is at nearly $97 a barrel, gold is at $901 an ounce, and the yen is at 105 (weaker than yesterday’s 104). MacroMan provided more color:
With the end of the quarter and the three month date about to rollover into the new year, the dash for cash has generated substantial distortions, despite the recent central bank dollar swap announcements. First quote of the day for overnight dollars was 13.5%, and yesterday’s ICAP 3 month quote was 4.375%. The last time 3 month LIBOR was that high, Fed funds were 4.25%. The ruptures in the market can be seen in the chart below, which shows the 2-10 US government yield curve and the 2-30 US swap curve. Unsurprisingly, they are normally very highly correlated. However, recent front-end stress have driven a very significant wedge between government and swap curves
Quarter-end also brings about the usual mechanistic rebalancing flows from pension funds and other long-term real money investors. It appears that such flows are already going through in Europe, helping to generate a vicious intraday bounce in stocks. Well, it’s either that or the news of another Benelux bailout or an Irish government bank guarantee.
Or perhaps the market has decided that news which apparently ushered in a new Great Depression last night is actually pretty meaningless this morning. Macro Man and the chap next to him, both of whom are short stocks, have just been left shaking their heads this morning.
Note that FT Alphaville last week had said that Bloomberg on stock futures:
U.S. stock futures rose, signaling the Standard & Poor’s 500 Index may rebound from yesterday’s 8.8 percent plunge, after lawmakers said they intend to salvage a $700 billion bank-rescue package.
JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc. advanced more than 5 percent as Judd Gregg, the Senate Banking Committee’s ranking Republican, and Barack Obama, the Democratic presidential candidate, said a deal would eventually pass. Christopher Dodd, chairman of the banking committee, said senators may deal with the bill tomorrow…
S&P 500 futures expiring in December rallied 24.40 points, or 2.2 percent, to 1,143.20 at 7:08 a.m. in New York. Dow Jones Industrial Average futures gained 149, or 1.4 percent to 10,623. Nasdaq-100 Index futures added 0.7 percent to 1,523.25. European stocks rose, while Asian shares declined. Government bonds in the U.S. and Europe fell. The dollar climbed against the euro.
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Same old same old with the market. The last 18 months or so have been remarkable for how often the market bounced back when you thought a rebound not even remotely possible. Not only that, the upside was often led by the most troubled sectors, e.g. homebuilders and financials in late winter/early spring this year. Not enough of these bottom fishing ‘value’ investors have learned the hard way yet I guess. Although they will be right eventually…
I’m a little embarrassed at how long it has taken me to wonder if it’s the Fed lending which is the cause and the overnight rates the effect, rather than the other way around as is commonly surmised. I feel a little better in realizing, however, that while it took me a while to have that insight, I don’t think anyone at the Fed has yet.
imagine what this is going to do to all those Alt-A ARMs indexed to LIBOR.
yeeesh.
The solution seems pretty simple to me. Let overextended banks fail. Bail out just federally insured depositors. If credit is restricted, So what? This credit restriction is a good thing. Easy credit started this mess, and it always has been responsible for the average person having an amount of debt just slightly less than his bank savings, and thus partly responsible for his being poor. All the government has to do to avoid deflationary spirals and concomitant depression is to give emergency tax relief or to increase useful government spending. Isn’t the whole point of the Federal Reserve that it allows the money supply to be controlled centrally? And isn’t a main point of being off the gold standard that the money supply can be increased even when the banks are failing? Decreased taxes and increased government spending–supposedly the Congress is too undisciplined to avoid these behaviors even in normal times. Now that these behaviors are needed, Why shouldn’t our government be able to manage them?
Immediately send out to everyone who got a rebate check this summer the same thing times three (or whatever is necessary). Send each state government $1000 for every inhabitant per last census (and don’t leave out D.C. and the territories). Give our armed forces members a bonus in gratitude for their service. Etc., etc., etc. The government has full power to avoid deflation by printing money (by issuing bonds which the Fed can keep once they obtain them from the Treasury) and giving it to the people. If I’m not mistaken, the Fed can’t do much on its own by way of supplying cash now that interest rates on treasuries are near 0. This newly created money is preferable to the so-called debt money that banks create. What’s more, Where do people think this money will go? Eventually, it will end up in banks, thereby helping to avoid bank runs and correcting their negative non-borrowed reserves, and if I’m not mistaken, these depositors (and the FDIC insuring those deposits) will have higher seniority than the typical bondholders of these banks, a good and just thing should these banks go bankrupt; funding via deposits is preferable to funding banks in exchange for some contingent equity stake that puts the taxpayer behind the bondholders. Finally, permanently restrict credit drastically, e.g., by requiring high reserve ratios and outlawing securitization of loans.
What I find interesting this morning, is the stress in the system, the systemic collapse and increasing risk of meltdown — BUT, this dramatic condition is being linked to politics and the MacBeth-like push for a bailout plan designed (once again) to goose the stock market and thus increase the compensation of fat cats that rely on the easy availability of a tsunami of option grants — the very mechanism which will burden American taxpayers for decades! Contrast the fear mongering now to the weeks after 9/11 and the level of pro-patriotism where America wanted to unite against an enemy and work to make America stronger — today, we have a common cause as Americans to unite against the corruption within the financial system – to unite against wall street and washington. The majority of people do not want to support financial terrorism which comes from within our government or to bailout corruption and accounting fraud on wall street!
This plan being pushed will help the terrorists make money at the taxpayer expense and taxpayers will never make a penny as they are placed in inflationary hell! The people that will make money will be buffett , gross and the CEOs that have melted our economy!
Mr. Meigs,
Please read the comment by Richard Kline posted with an earlier article on this blog- “Merrill Low Treasury Yields to Go Even Lower”. He describes, in a very thoughtful way, the potential negative impact of just pumping up the sytem system with complete abandon.
Don’t forget that many ARM’s are tied to the LIBOR.
doc holiday said…
….and the MacBeth-like push for a bailout plan designed (once again) to goose the stock market and thus increase the compensation of fat cats that rely on the easy availability of a tsunami of option grants —
Though I have no sympathies for the rich, I actually believe they are most frightened now by the effect a collasping stock market will have on the common man’s 401K or IRA.
With the massive losses the baby-boomers have endured via their home values, there will likely be violent protests if the retirement accounts are also ravaged.
Not to mention the party most often associated with Wall Street and riches is also the party that would like to eliminate Social Security.
These folks better have their passports up-to-date because the gated communities will be over-run.
I am with Stephen A. Meigs, because he is with common sense!
This is off topic Yves, but I just ran across something I don't like, which is a media campaign to apparently bring racial tension into this bailout proposal, which I guess is a smoldering problem hidden below the surface of this very bad election year, where America has virtually no hope of maintaining itself as a place of democracy and freedom.
I just ran across a story, titled:
Host of factors contributed to bailout’s demise
This story points fingers but then ends with the following "message":
Ninety-five freshman, Hispanic and liberal Democratic lawmakers voted against the bill.
http://www.bizjournals.com/phoen…29/ daily11.html
>> As I often do, I research things, and I came across the story at another location, which was odd, so I put in a search at google for the story title, and see there are 77,000 stories being linked to this, e.: Google: Results 1 – 10 of about 77,000 for Host of factors contributed to bailout’s demise
http://www.google.com/search?cli…=UTF-8&oe=UTF- 8
77,000 PR links to this:
Ninety-five freshman, Hispanic and liberal Democratic lawmakers voted against the bill.
This is awful in my opinion and needs to be a story in mainstream medai!
Did anyone else pick up on a rumor started by ‘The Magambo Guru’ on ATOL a couple of days back?
The Guru said that he heard via the grapevine that China is considering a GOLD backed currency.
Think about the implications of such a move…
River
Calculated Risk published this squib from Ireland, where the government has decided to put 500bill Euro behind the banking system for two years.
http://calculatedrisk.blogspot.com/2008/09/irish-guarantee.html
The link compares that number with some others. For this one little country on its own is putting in 80% of the $620 bill package the Fed did yesterday ($450 of that went to “Europe” with UK getting $80 of it.)It is a two year program to support the whole banking system (four banks).
We sometimes use the word Europe loosely enough to conflate different institutional and regulatory regimes into one.
Ireland is a case where non-ECB regulated (UK) finance and the ECB come together with the US. The size of this number, continuing rumblings about after shocks from Lehman, Merrill Lynch and AIG, hedge fund redemptions and Spanish real estate, all kind of indicate some tectonic shifts going on down there where the different pieces of the financial world come into contact with each other.
Hope someone has some insight into this.
The L.A. Times front page today is more shameful doom-saying hyperbole. The L.A. Times and NPR still replay the message they got straight from Cheney's office.
Guess what? The sun came up and most markets are working. This is what a national-scale deleveraging looks like.
Right now, the S&P is trading at about the average trend over the entire history of the index. It will probably go down a little more as more deleveraging is worked out of the U.S. The sun will rise again tomorrow and markets will trade again.
The Fed needs to force the trust issue somehow. Right now banks don't have to lend to anyone. They just go to the central bank.
I can’t get through to my Congressman, are other people having trouble with democracy? Do these people only come to town when they need votes?
http://www.house.gov/dicks/
If anyone gets through, can you tell him he’s an idiot!
[URL=http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3104666/Banking-crash-hits-Europe-as-ECB-loses-traction.html]Telegraph. uk[/URL]……
“The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days,” he said.
I don’t buy the reason that the market is up because of bailout hopes. Yesterday the market was down about 400 points before the vote. This is bargain hunting.
I certainly hope the current financial crisis doesn’t lead to the demise of YouTube. Right now it’s possibly one of the USA’ most valuable exports (along with microprocessors).
guys:
You should understand that the market is ahead of the news. So,
why are you spending your time talking about the past when you could profited from it. You have to be ahead of the curve.
I wrote yesterday that you should buy the bottom towards the close. Some wrote that I was an idiot to buy the bottom at close. It has made a lot of money.
Now it is time to take profits. A call to this effect has just been issued at financialtraders.blogspot.com . 80 NDX profits in less than 5 hours of trading (NDX is around 1500 range). Do the maths folks. Make sure you receive the information that fills your pockets. That is the name of the game.
http://financialtraders.blogspot.com/2008/09/nq-qqqq-ndx-qid-stock-trading-profit.html
I completely agree with FT Alphaville’s observation, that massive, _cheap_, unquestioned central bank liquidity has exacerbated credit shortages. The idea of a lender of last resort from its inception was to lend freely _to sound banks_, AT PENALTY RATES. This is excactly what Bernanke and Paulson _have not done_, which only illustrates the extent to which they are in the industry’s vest pocket. Bernanke’s Easy Facilities are all buttered carrots and no stick. Even dead banks can post rotting collateral at far above market rates. Why would the banks lend to each other at all when they can get everything they want and more from Sugar Daddy?
There is no threat to take out insolvent banks, either. Oh, if a bank is in actual collapse before our eyes, the authorities will act—to save their counterparties in similar shape, not the liquefying firms. Over and over from Paulson in various contexts we hear how ‘important it is for interventions not to be punitive.’ Important to WHOM?? By coddling broke banks, Paulson has destroyed spreads, and is threatening lending activity in the real economy. His philosophy is a failure, but that should come as no surprise. He’s a caddy for the industry, and as the bubble shows they _cannot_ save themselves from themselves. And just so now, as in the industry’s Easy Facilitation and Preferred Proposal, the industry’s language will not save themselves from themselves.
Credit spreads are undoubtedly tightened by end of quarter issues as well. But beyond that, there seems to me more than a whiff of a ‘lenders strike’ as well. These big financials _WILL_ get their bailout, and will hold the real economy hostage until they do, with the Fed’s No-Question terms putting _the industry_ in the driver’s seat. This is exactly why we need a public slice of the banking industry to lend to the real economy when lenders go on strike. Lead, follow, or get out of the way, but don’t lie down in the middle of the highway screaming for another bottle.
So Stephen Meigs, I half agree with you; the first half. We do need to _close_ insolvent banks. That is different than letting them fail, whereby their unwinds can be disorderly; better to seize failing banks, and do a controlled burn. Yes, that may be somewhat more expensive for the public, but the increase in stability derived is worth it. I also couldn’t agree more strongly that the first fulcrum of a public intervention in the financial crisis involves making the deposit guarantees rock solid, and unquestioned. This is not even so much a question of fairness, or a desire to favor middle class depositors over wealth class lenders. We have to know what the solid assets are in the banking system, and guaranteeing appropriate levels of deposits draws a fence around assets that will and deserve to be defended. Bankers aren’t going to buy deposits (and thereby keep the banking system running), if they know those deposits have no backstop, either.
I’m opposed to birdshot stimulus proposals, however. We have had over-consumption in the US, and we have to get our consumption figured out differently. Such proposals are mondo expensive, but with quite transitory gains, and not even necessarily good ones. The best focus for the expense of public funds is in _targeted_ lending to keep the banking system and real economy going. That may not feel like much ‘relief’ to us average taxpayers, but it will support the job market better, and keep realistic home mortgages and car loans available at the retail level, i.e. match consumer borrowing with consumer cash flow. This matters far more than getting a $500 check for Christmas. A stimulus plan should be more Johnny Appleseed than Nick the Saint. [And I know that Appleseed isn’t that good a metaphor in reality, but let’s leave it there.]
I think deep down, the majority of Americans are willing to endure the hardships of a recession if it truly means the absolute killing of the [financial industry] beast [as we know it] once and for all. It has been sapping our energy and resources for entire lifetimes. The negative reaction of the public [to the bailout] is the same as a driver floors a vehicle when a carjacker tells him to stop. Or better yet, it’s like when Captain Kirk unflinchingly sets the destruct codes to blow up the Enteprise saying, “Either I command my ship or nobody does.”
Richard Kline–As for consuming being excessive, I think that is only part right. Discouraging consumption is always appropriate in a sense, because if people can be discouraged from spending, then by printing money to make up for the slackening of demand, voila! everyone can be made more wealthy without materially affecting how the economy functions. Excess consumption is bad because it conflicts with people having wealth, and wealth is what ordinary people sorely need more of. But encouraging consumption by giving people wealth does not make them less wealthy, and so it is nothing to fear in my opinion. But I’d say that except for the wealthy, people in the U.S. aren’t consuming enough, largely because they don’t have enough wealth. The store of value people have in cash will be mostly offset by their debt when debt is easy—largely for this reason and because debtors must pay interest, most Americans have little wealth or security.
To me, straightforwardness and simplicity in an adjustment is better than a complicated one that worries a great deal about effects that are higher-order with respect to time. Higher-order phenomena are probably very hard to predict (e.g., who knows when foreign governments will stop buying US debt?), and when it comes time to making correcting adjustments later, it will be easier if our government is trying to adjust something brought about by something easy to understand.