17 March 2008

Let's Just Print More Money! Woo!

Financial market crises often end with a final, cataclysmic event — a rush of panic selling of stocks or a sudden drop in a currency's value. With the stunning collapse of Bear over the weekend, many investors are asking themselves: Is this the final upheaval in the earthquake that has been building since the capital markets first started shuddering last August? The answer, and a major reason for the turmoil in the first place, is that no one — not even Fed or Treasury officials — has any idea.

Until Bear Stearns began to unravel Friday, the financial market had been focused on the Fed’s regular interest rate-setting meeting Tuesday. Most expected the central bank to cut the short-term rates again; opinion was divided between a half or three-quarters of a percentage point.

“What we're in here is the closest thing we've seen to a bank panic since the Depression,” said Senate Banking Committee Chairman Charles Schumer. “It's with investment banks, it's with larger investors. But it's the exact same thing. Confidence is so important. The quality of the asset matters less than confidence, and hopefully this move will restore confidence when it comes to some of these other firms."

Now forecasters have all but thrown up their hands trying to predict what the Fed will do tmrw. Given the tumultuous environment, many expect the central bank to slash the benchmark overnight lending rate by a full percentage point, to 2%, less than half the 5.25% level when the Fed began cutting rates last June.

Some investors worry that the Fed’s aggressive efforts to pump tens of billions of dollars into the financial system comes with a hefty price — higher inflation and a weaker dollar.

To make matters worse, the turmoil shaking the global credit markets is not about the cost of money. Banks have cash, and if they need more they can borrow it cheaply from the Fed. The problem is that, after watching assets backed by mortgages melt away, banks are afraid to lend.

Some observers see the dramatic collapse of Bear Stearns as a sign that the worst may be over. Sacrificial lamb much?

Sure, once the fear is alleviated, liquidity will come back into the markets but no one knows when that’ll be. The reason is that much of the distressed debt at the source of the credit meltdown is held outside of the view of regulators and investors in the global credit market — the banks, investment firms, pension funds, insurance companies and others who swap trillions of dollars worth of debt every day.

What’s got them all spooked is a relatively new form of debt securities based on highly complex transactions used to offset the risk of borrowing. Those pieces of paper turn out to be difficult to price under the best of circumstances.

With home prices falling, and billions of dollars of paper backed by mortgages at risk of default, the biggest unknown is tied to the million of loans scheduled to reset to higher rates that many homeowners will be unable to keep up with. So until the housing market shows some signs of stabilizing, it’s all but impossible to know how much more money will be lost from mortgage defaults.

Fed officials are hoping to overcome the breakdown in confidence by making money cheap —and offering to lend to whoever need its. In guaranteeing the credit line that JPMorgan used to back Bear Stearns obligations, the Fed crossed a line that has historically walled off the tightly regulated banking industry from the far more risky securities business.

But hey, what the fuck do I know?


Anonymous said...

Its so hard to get people to feel bad for investment bankers. Bear Chairman and Chief Executive James Cayne received a salary and bonus of $33.85 million in 2006. Where was the outrage? And that is of course just one bonus for one individual. Why don't you start calling out CEO's and their ridiculous compensation plans year in and year out. Better yet how about a movement to get them to give back the ridiculous bonuses they stole from your fellow employees and their retirement plans worth piss now. That company could have been saved if those blood sweat and tears pioneers gave a shit about you.

Anonymous said...

why argue things in the rearview mirror? it's time to look ahead