Friday, March 14, 2008

Fed Steps In Again

Clearly, regardless of what the talking heads are trying to hoodwink us to believe, our US financial system has enormous problems that will ultimately require massive doses of Fed assistance—at the expense of our Dollar and standard of living.

We’ve already seen Central Banks inject over $1 Trillion since August, but you need not worry—the presses are warm now, but nowhere near overheating --in due course. there will be much more printing to follow.

I was initially thinking, come March 18th, we would likely see a 50bp cut by the Fed, but after today’s fiasco with Bear Stearns I’m now leaning towards a full 100bp (1%) cut. In the process, we may have to wave goodbye to the once almighty dollar as it falls off the cliff and into the abyss.

Bottom line: The Plunge Protection Team, headed by Treasury Secretary Paulson (former chairman and chief executive of Goldman Sachs) has no choice but to cut big and inject large (bailout); else they may witness the foundation of the world’s financial system collapsing around them—spawning the biggest economic depression ever seen.

These guys (justifiably) are scared shitless...

Bear Stearns Cos. Inc. went on life support Friday

Bear Stearns went on life support Friday, forced to accept an extraordinary bailout package after being deserted by the clients and counterparties at the heart of the 85 year-old Wall Street firm's business.

Triggering a sell-off throughout the financial sector, Bear shares slumped 47% to $30, their biggest one-day drop in at least two decades.

Bear said the rescue consists of getting short-term financing from the Fed, through J.P. Morgan, after its liquidity "deteriorated significantly" during the past 24 hours.

"The financial system supervisors are attempting to prevent this company's problems and the perception of problems from rippling through the system to other financial players," David Hendler, an analyst at CreditSights, wrote in a note to investors. "Given Bear Stearns' huge impact in the mortgage, derivatives and funding markets, we sense that a salvation acquisition is the most likely possibility."

Bear's crisis is the latest sign that the U.S. financial system is cracking under the weight of a global credit crunch that was sparked by last year's subprime mortgage meltdown. The Fed has slashed interest rates and central banks have injected roughly $1 trillion into the banking system since then, but the crunch continues.

The Fed's decision to bail out a brokerage firm recalls other financial crises in which authorities tried to limit turmoil by propping up institutions including Penn Central, Continental Illinois, Orange County, California and hedge fund Long-Term Capital Management.

"What is different this time is that the dominoes are falling in so many different sectors, markets, industries and countries -- all at the same time and there is yet no end in sight," said Sherry Cooper, chief economist at BMO Capital Markets.

Bear's situation turned dire this week by growing concerns that it's struggling to trade with some counterparties. Some market participants have been worried about Bear's exposure to the dwindling mortgage business and its holdings of securities backed by home loans.

Trading is the lifeblood of brokerage firms, so when counterparties pull back trouble often ensues.

The New York Fed said its board unanimously backed the JP Morgan plan. "The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system."

Bear Stearns Posts First Loss in 84 Years

NEW YORK (AP) -- Bear Stearns Cos., the No. 5 U.S. investment bank, said Thursday a bigger-than-expected write-down in its mortgage portfolio caused the first quarterly loss in the company's 84-year history.

Chief Executive James Cayne, under pressure like other chief executives on Wall Street, warned in November that the investment bank would take a $1.2 billion writedown from subprime-related investments and fixed-income trading. And, like rival firms, the losses ended up being much steeper.

Bear Stearns Collapse Reveals Crisis in Confidence

The contrarian --As the nation arguably draws closer to a possible financial meltdown than at any time in the past 79 years, it may no longer be relevant to question whether or not we are actually "in a recession."

As a matter of fact, it is becoming increasingly apparent that the Federal Reserve may be running out of thumbs with which to plug the emerging holes in the dike.

And it is not necessarily encouraging that the president found it necessary to assure the public, in a televised address from the Economic Club of New York, today, that the economy will bounce back.

The package of proposals unveiled yesterday by the Treasury Department, incidentally, have been described as only involving a greater degree of self-policing by the financial industry, and have been characterized by critics as being too little and too late.

Further underlining the seriousness of the situation, the president's address was followed a little later today by a televised speech from Federal Reserve Board Chairman, Ben Bernanke, discussing the credit crunch and the its origination in the orgy of sub-prime mortgage originations.

Today's crisis swirls around Bear Stearns, a leading global investment banking, securities trading and brokerage firm, in business since 1923. Alan Schwartz, president and chief executive officer of The Bear Stearns Companies Inc., said, "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated."

CNBC reported this morning that the problems resulted from a run on the firm by its customers.

As a result, the company's stock plummeted as much as 40% today and the Fed quickly enlisted the services of JPMorgan Chase & Co. to provide an emergency loan facility and presumably to execute the purchase of certain Bear Stearns assets at steep discounts.

The general situation is generating considerable controversy over whether it is proper for the Fed to bail out institutions that abused their fiduciary responsibilities and borrowers that took on excessive credit under ill advised terms. Questions are also being raised over potential favoritism on the part of the Fed, especially as pertaining to its tapping of JPMorgan Chase & Co. to take over some of Bear Stearns' assets at bargain basement prices.

Bear Stearns' bailout has echoes of 1907 panic

BOSTON (MarketWatch) -- Over a century after John Pierpont Morgan single-handedly staved off a potential run on U.S. banks -- by forcing rivals to come together to save their own -- his name is also linked to the latest bailout of a teetering financial institution.

Before there even was a Federal Reserve, financier J.P. Morgan during the panic of 1907 played a key role in preventing a potential disaster for financial markets. Now, J.P. Morgan Chase & Co. is working with the Fed to help save Bear Stearns by providing it with emergency financing…

Of course, this isn't the first time the Fed has joined hands with Wall Street to orchestrate a bailout.

The most recent case was its role in saving Long Term Capital Management. The hedge fund, run by some of the best and brightest from Wall Street and academia, was undone by leverage during the credit shakeout in the late 1990s.

Similarly, investment banks and hedge funds in the latest credit crisis have also been burned by the use of leverage. Several institutions have already been overwhelmed by margin calls triggered by plunging values in mortgages and other bond assets.

There are also some parallels to the financial panic in 1907, which was triggered by an unwillingness of some New York banks to make loans -- unwillingness that spread across the country. Stock investors were anxious over market declines, the economy was in the grips of a recession, and lending was tight.

So, what are the impacts of another Bailout?

Inflation, falling dollar and a much lower US standard of living… It’s that simple!

As one of my favorite inflation writers (the Mogambo Guru) likes to say: "We're all friggen Doomed"!




Anonymous said...

So when are you going to interview Peter Schiff : )?

Randy said...

Peter Shiff is the Man! He is one of the few who called this thing by the numbers -- before it actually unfolded. Peter Schiff Videosl

I agree with most everything he says--except that the world economy will decouple from the US.

Economic decoupling will eventually happen (over time), but right now, I feel no country is safe from the massive downturn on the horizon.


Maurice said...
This comment has been removed by a blog administrator.

The fed has made a mess.


The fed should step aside.