Posted on 10/05/2008 10:02:52 PM PDT by bruinbirdman
The Federal Reserve and US Treasury were on Sunday night under increasing pressure to follow passage of the $700bn financial rescue plan with further measures to shock the ailing credit markets back to life.
Among the options available to policymakers are additional liquidity operations and an emergency rate cut – possibly in co-ordination with other central banks. A combination of the two is also possible.
The Fed is likely to further expand both the size and scope of its liquidity operations. Experts believe it could address a shortage of US Treasuries that has emerged as investors have looked increasingly to government paper as a safe-haven investment and collateral for trades. This could happen through an expansion of the Term Securities Lending Facility, which was created by the Fed in March to help banks access liquidity during the crisis.
Another potential target of intervention is the commercial paper market, which has been shrinking substantially in recent weeks. Money market funds could, for example, be allowed to borrow money via banks to fund their holdings of commercial paper. Some experts think the Fed could take the radical step of offering term loans on an unsecured basis to regulated banks at a fixed spread over its main interest, therefore capping the interbank lending rate, which has risen sharply during the crisis. This possibility has become more realistic following passage on Friday of the “troubled asset relief programme”, which gave the Treasury the authority to guarantee the Fed against any losses incurred in such an operation.
The Tarp legislation also gives the Fed the power to pay interest on reserves to help smoothe liquidity operations – authorities the US central bank is soon expected to announce it will use.
Mounting expectations of another intervention to shore up the credit markets highlights the extent to which enactment of the $700bn bailout is not the sole instrument of the US government’s response to the financial turmoil.
“The Tarp bill is a condition necessary but not remotely a condition sufficient to recovery,” Orin Kramer, chairman of the New Jersey State Investment Council, told the FT. “You need to activate the Tarp quickly, and you also need a robust central bank response to the dysfunctionality of the commercial and municipal paper markets.”
The US Treasury could as early as Monday take the first big step towards the implementation of its $700bn plan to buy troubled assets from ailing financial companies by outlining the guidelines for the selection of a handful of private asset managers to run the programme.
After securing congressional approval for the rescue plan on Friday afternoon, Hank Paulson, Treasury secretary, vowed to “move rapidly to implement the new authorities, but also methodically” and insisted that “transparency” would be important throughout the process.
The core of the Treasury plan – a reverse-auction mechanism for the acquisition of the troubled assets from a range of financial institutions – will not function until next month at the earliest.
Over the weekend, Treasury officials have been working on the release early this week of criteria for the hiring of several large asset management groups that will be charged with managing the portfolio of assets purchased by the government.
The groups will be expected to turn round their applications quickly so the Treasury can start evaluating the proposals by the end of the week.
Asset purchases by the Treasury will focus on securities backed by home mortgages. The Treasury was also granted the power to purchase other assets if it deemed it necessary.
What we really need to do is give out more loans to lowlife deadbeats who have no intention of paying them back.
And so it continues. Keep your hands over your wallets, folks.
Memo to Feds:
Reduce tax rates 5% across the board.
Triple the mortgage deduction.
Perp walks for Dodd, Schumer, Frank et al.
Quick, someone grab the paddles! Give me 10 gazillion dollar watts! CLEAR! No conversion, OK give me 100 gazillion dollar watts! CLEAR! Good, we have normal credit flow!
Im guessing lots of clintonistas...
i think the mortgage deduction is a bad idea as it really distorts the market. just raise the standard deduction and cut rates
Good point. How about increasing the mortgage deduction ONLY for existing mortgages? People are stuck in their homes anyway for several more years (as I see the real estate market) and Congress is more likely to raise a deduction than give a special tax break.
Raising the deduction on existing mortgages would at least direct some “bailout” to those who are actually paying their mortgages, albeit on homes often worth much less than what is owed.
Will we wake up tomorrow morning to experience a US bank holiday with banks, credit cards and atms out of operation for a week or two as the Fed and Treasury adjust to events moving too fast, like a foreign run on US banks?
That's the Dems' "Trickle Up" theory.
“Perp walks for Dodd, Schumer, Frank et al.”
Please. Oh please. Yes. Now.
Like Zimbabwe..., we will soon turn in our currency and merely add "000" to the respective denominations in order to "solve" the problems!
Maybe. And that is scary as heck.
I say raise interest rates 5%. The economy is alread screwed. Raise rates and Bernanke says to the world he is serious about getting spending under control. Bernanke, will of course, lower rates, monitize the debt and make things worse.
You said — “Will we wake up tomorrow morning to experience a US bank holiday with banks, credit cards and atms out of operation for a week or two as the Fed and Treasury adjust to events moving too fast, like a foreign run on US banks?”
I know the answer that some people will give you — if you can’t access your credit on your credit card and you can’t access your money in the bank — and, as a result, that puts you “over the line” and you go bankrupt.
They’ll say to let you fail — that it will “clean out the system” if you fail (that’s good, you see...) and that will be good for everyone else... LOL...
A closed US bank system could happen to prevent runs, and, it will not be good for anyone. The possibility of a foreign run on US banks is possible now, and immediately so, as some foreign banks are guaranteeing their accounts in execess of current US guarantees. Hope it does not happen. Because financial events have a life of their own now, it is possible.
The problem today is potentially huge with the CDS of Fannie and Freddie up for settlement...here is, from Roubinis site, comments and figures of the potentital problem..http://www.rgemonitor.com/
“# On Oct 6 the ISDA conducts an auction in the credit derivatives markets to set the price tag for settling up to $500bn of contracts related to Fannie Mae and Freddie Mac. By some estimates, these payouts could amount to $75bn, assuming a recovery value of 85 cents in the dollar. On Sep 8, 13 Wall Street firms agreed unanimously that the government seizure of the biggest U.S. mortgage-finance companies Fannie and Freddie qualified as a so-called credit event on CDS contracts covering more than $1.4 trillion in debt. Upon the bail-out of all debt securities alike, senior and subordinate, the value of these underlying securities recovers near par meaning that protection sellers will only need to cover a small portion to make protection buyers whole. The absolute losses however increase with the number of outstanding contracts.
# As there are likely more creditors than securities outstanding, ISDA organizes an auction to determine the value of the insured securities as well as the amount of pay-outs due in a cash settlement.
# FT: Michael Hampden-Turner, credit strategist at Citigroup in London, estimates there are $200bn-$500bn of outstanding CDS and other credit derivatives referencing Fannie and Freddie—> This would make their default the biggest the market has encountered. The previous record was held by Delphi, the US carparts maker that went bankrupt in 2005 and which had about $25bn of CDS.
# cont.: Currently, the recovery value of the Fannie Mae and Freddie Mac CDS is expected to be about 95 cents in the dollar, leading to a potential 5 per cent loss for counterparties who offered protection against a default. On CDS worth $200bn-$500bn, losses would come to $10bn-$25bn.
# FT: GSE protection sellers are mainly insurance companies and banks. However, hedge funds will also likely take a hit from previously nice CDS premium income that falls away.
# naked capitalism: Although the payment per contract is comparatively small (5% of face value), the amount of contracts outstanding is so large that the collective hit will be significant.
# see also Confessions of a risk manager (via Economist): “We had not fully appreciated that 20% of a very large number can inflict far greater losses than 80% of a small number.”
# Bliss/Kaufman: Netting out all outstanding contracts in the $62 trillion CDS market as the ISDA suggests, might lead to small net exposure of $15bn but the systemic risk arises from the sheer size of the market that was allowed to grow unchecked. “
Oh yeah, I agree it could happen and is more likely to happen the more people gripe and complain about a “bailout” — which just serves to deepen the suspicion that everyone has about the stability of our financial system and thus, make a “run on the banking system” (as a whole) more likely.
And those very same people who gripe and complain about a bailout, will also be glad to see those who “fail” during such a crisis (too), because they also think this helps “clean out” the system of all the dead wood (which would include you, if you are one of those who is severely impacted by these kinds of things, you see...).
Their thinking is that the more that fail and go bankrupt — that this clears the “system” of all that dead wood that shouldn’t have been there in the first place and that means that the system will get back on its feet faster (once you’ve been cleared out of the system, you see...). And that “you” — refers to anyone who would fail and/or go bankrupt during this kind of severe downtown and financial crisis (including, of course, many of the readers and posters on Free Republic, “dontcha know...”).
Kind of makes you wonder if there might be a higher power at work here.
“...an everpresent comfort in times of trouble.”
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