Friday, September 19, 2008

WHY CAN'T WE ALL JUST GET ALONG?

MAJOR NON- confirm here with TRAnsports near old highs...UTES and DOW same boat....something gonna give.

D
Posted by at

4 comments:

Anonymous said...

Botched rescues are killing markets
The ill-conceived Fed and Treasury interventions in Lehman, AIG, Fannie Mae and Freddie Mac are making matters worse. Is it any wonder how we got into this mess?

Latest Market Update
September 19, 2008 -- 16:30 ET
[BRIEFING.COM] The Dow closed nearly 370 points higher Friday, marking the end of a volatile week. The Dow registered triple-digit swings during each of the week's trading sessions.

The weeklong ride took participants both high... More

advertisement
Article Tools
E-mail to a friendTools IndexPrint-friendly versionSite MapArticle IndexDiscuss in a Message BoardDigg This By Jim Jubak
Save us and the financial markets from the folks at the U.S. Treasury and the Federal Reserve who are now riding to the rescue. They're making a terrible mess even worse.

Nobody in the financial markets believes these guys. On Sept. 16, when the Federal Reserve's Open Market Committee voted to hold interest rates steady at 2%, the federal funds rate fell to 1% in the markets, way below the 2% target.

Think the markets are convinced the Fed will have to cave and cut interest rates no matter what it said Sept. 16? Of course they are. And they're almost certainly right. That's why stocks rallied on what was bad news.

More importantly, for any of us who hope to see the economy start to deliver jobs and growth again, watching the Treasury and the Fed try to "save" us is a horribly graphic reminder of how they got us into this mess.

We can thank their addiction to flooding the market with liquidity and their inclination to look the other way for inflating the housing bubble, when they should have exercised their regulatory powers to deflate it. And we can now thank their "solution" for making the damage worse.

By saying one thing one day and doing something else the next, they've left the financial markets without any reasonable guidance. Remember how they told American International Group (AIG, news, msgs) that there would be no bailout, then bailed out the company anyway? Anybody have any idea which companies the Fed and Treasury will save and which they won't?

Talk back: Which company is next? WaMu? Morgan Stanley?

In the name of an apparently newfound belief in the free market, they destroy one of the few remaining ways that stressed financial companies can raise money in the public financial markets. And in the name of creating an orderly liquidation of a company such as Lehman Bros. (LEH, news, msgs), they create a mad scramble to get paid before the bankruptcy court can act. And their most recent intervention, the $85 billion bridge loan to AIG, makes it clear the Fed and Treasury no longer understand what's at stake in this crisis -- if they ever did.

Playing favorites
Let me give you some examples of exactly how the Fed and Treasury have made a bad situation worse in the past week.

Start with the government takeover of mortgage giants Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). Most questioning of this deal has focused on whether the danger to the financial markets justified U.S. taxpayers stepping in to guarantee $5.9 trillion in debt and debt guarantees issued by these two private companies.

AINT THAT THE TRUTH.

8:32 AM
Anonymous said...

continued:
In the name of an apparently newfound belief in the free market, they destroy one of the few remaining ways that stressed financial companies can raise money in the public financial markets. And in the name of creating an orderly liquidation of a company such as Lehman Bros. (LEH, news, msgs), they create a mad scramble to get paid before the bankruptcy court can act. And their most recent intervention, the $85 billion bridge loan to AIG, makes it clear the Fed and Treasury no longer understand what's at stake in this crisis -- if they ever did.

Playing favorites
Let me give you some examples of exactly how the Fed and Treasury have made a bad situation worse in the past week.

Start with the government takeover of mortgage giants Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). Most questioning of this deal has focused on whether the danger to the financial markets justified U.S. taxpayers stepping in to guarantee $5.9 trillion in debt and debt guarantees issued by these two private companies.

Is Bank of America now too big?
Feds bailed out China, not the US
Poof! There go Americans' dreams
A desperate but necessary bailout


I happen to think the deal was justified in those terms: Regulators allowed those two companies to get so big and to make so many reckless loans that their failure would have wiped out the financial markets that fund mortgages.

But just because I think the takeover was the best course in a bad situation doesn't mean I think the Treasury and Fed struck a good deal. In a good workout deal -- and this was a workout -- everybody takes a hit, and the size of the hit depends on where an investor stands in the ranks of company creditors. Owners of common stock almost always get wiped out. Holders of junior debt, called subordinated because it ranks below senior debt, take a bigger haircut than senior debt. But no debt holder walks away from a situation like this unscathed.

Except this time. Holders of senior debt got paid 100 cents on the dollar, and so did holders of subordinated debt. Common shareholders got zip, and so did owners of dividend-paying preferred shares.

Overseas investors and speculators cash in
The precedent here is terrible. Investors in Fannie and Freddie got paid not depending on what they owned but by who they were. Because so many overseas central banks and investment funds owned the senior debt and the guaranteed paper, they got paid 100% -- because the Fed and Treasury were scared that even delivering a 10% haircut to sophisticated investors who should have recognized the risk in what they were buying was too risky for a country that's as dependent on the money of strangers as the U.S. is.

Fannie Mae and Freddie Mac had, without a strong dissent from anybody in Washington, marketed their debt to overseas investors by encouraging them to think it came with a U.S. government guarantee. Maybe the Treasury and Fed genuinely believed Fannie Mae and Freddie Mac had put the credit of the U.S. government on the line.


Who'll bail out the Fed?

The Fed started the year with $800 billion in cash. That’s now down to less than $200 billion. What happens when the money runs out? asks Jim Jubak.

But what about the junior debt? We're not talking about a huge amount of money here --just $11 billion and $4 billion in subordinated debt from Fannie and Freddie, respectively. The original holders of this debt knew they were buying riskier paper. Recent buyers of the junior debt weren't investors but speculators betting that they could buy this debt cheap and that the U.S. government would make them rich.

And you know what? They were right. The Treasury and the Federal Housing Finance Agency told The Wall Street Journal that they don't know who holds this junior debt now, but the owners, The Journal speculated, include Treasury Secretary Henry Paulson's former company, Goldman Sachs (GS, news, msgs), and bond guru Bill Gross' Pacific Asset Management and its Pimco bond funds. This kind of investor needs a government rescue?

8:37 AM
Anonymous said...

continued:
This The deal didn't have to be structured this way. For example, in a Sept. 6 letter to Paulson, investment company Pershing Square Capital Management suggested that the subordinated debt be exchanged for warrants for common stock. The warrants would turn out to be valuable or worthless depending on how Fannie Mae and Freddie Mac performed.

Wiping out dividends -- and trust
The deal had another, bigger flaw, one far more important to any fix for the financial system than merely dishing out a few extra billion to speculators who didn't need the money. By wiping out the Fannie Mae and Freddie Mac preferred stock, the Fed and Treasury killed off any possibility that some other financial institution in need of capital could raise cash by selling these dividend-paying shares.

Talk back: Which company is next? WaMu? Morgan Stanley?

One of the problems confronting any financial company trying to raise cash is that because the price of its common shares has fallen so far, selling enough common shares to raise the required capital becomes impossibly expensive. If Washington Mutual (WM, news, msgs) needed to raise $8 billion, for example, selling common shares wouldn't be a viable solution because the entire company is now worth just $4 billion, according to the stock market.

But because preferred shares come with a dividend that gets paid before any dividend on the common shares (and in the case of cumulative preferred, the dividends pile up for future payouts if the company misses a pay date), they've held up better in this crisis. As long as the shares paid a dividend, investors were willing to buy them. And, critically to strapped banks, the capital raised by selling preferred shares counts as Tier 1 capital, the highest-quality and hardest-to-raise capital.

The "rescue" of Fannie and Freddie finished that possibility. By wiping out the dividend on the $36 billion in preferred shares at the two companies, the Treasury and Fed have ensured that no conservative, income-seeking investor in his or her right mind would buy preferred stock from a troubled financial company looking for capital.

Playing taps
What were they thinking?

Maybe they weren't. After watching the hash that the Treasury and Fed have made of the Lehman bankruptcy, I sure have to entertain the possibility that the folks in Washington don't know what they're doing.

And maybe the Fed and Treasury hadn't remembered that Congress amended the bankruptcy code in 2005 to carve out special rules that applied to swaps, repurchase agreements and the other derivatives that have proved so toxic to Lehman.

Is Bank of America now too big?
Feds bailed out China, not the US
Poof! There go Americans' dreams
A desperate but necessary bailout


In most bankruptcy proceedings, all of a debtor's assets are frozen. The bankrupt company can't even pay a bill without permission of the bankruptcy court once the bankruptcy petition is filed. The point of this rule is to create an orderly distribution of the company's assets to the company's creditors. The creditors, ranging from the company's employees to its coffee service to its landlord to the big investors who own its bonds, all get in line by seniority. The bankruptcy court then doles out the liquidated assets of the bankrupt company until there are no more.

The 2005 exception threw that process out the window for the derivatives that Lehman owns. The counterparties in those deals are free to sell those deals on the market, if anyone wants them. They're free to take the collateral they'd given to Lehman as part of one of these derivative deals. Lehman took out hedges in the derivatives market to protect against a deal going bad or the value of a security (or another derivative) falling. The financial companies that were the counterparties to those hedges can now just rip them up, taking away critical protection for the company's portfolio just when creditors need it most.

And because the derivative market is so lightly regulated, it's likely that no one will even know if an asset walks out the door at Lehman in this way before it could be liquidated and distributed to creditors. In essence, the companies that were parties to derivative deals with Lehman are free to strike the best deals they can without having to clear them with the bankruptcy court or inform other creditors. Creditors' claims against Lehman come to $613 billion, according to bankruptcy court filings.


Who'll bail out the Fed?

The Fed started the year with $800 billion in cash. That’s now down to less than $200 billion. What happens when the money runs out? asks Jim Jubak.
The AIG about-face
Now you may find it odd that the Fed and Treasury have created a Lehman bankruptcy that's so unfair and chaotic while at the same time defending the deal as the best way to achieve an orderly liquidation of Lehman.

But that's the quality of the rescue that we can expect from the Fed and Treasury. Need a final example? Try the $85 billion takeover of AIG. After drawing a line in the sand and saying no more bailouts, the Fed and Treasury ponied up $85 billion in taxpayer cash to go into the insurance business. Their excuse for the about-face: Though the Fed had planned for a Lehman bankruptcy, it hadn't modeled a failure at AIG and couldn't predict the consequences of letting the company go into bankruptcy.

That's not reassuring.

Right now it looks like the Fed and Treasury are so focused on fighting today's fire that they've lost track of what's at stake. This crisis isn't about the U.S. housing industry or mortgage-backed assets anymore. What we're seeing is a challenge to the future health of the global financial system that makes the world's economy grow. I'll lay out that challenge in my next column

8:39 AM
Marc R said...

Well,

Is the FED balance sheet now at risk, it sure is not the same quality as before

7:14 AM

Post a Comment

Subscribe to: Post Comments (Atom)