Deep breath. Ok. First, I'd like to apologize for too few posts in the past week. As you can imagine, it has been quite hectic around here. Add the end of the quarter which requires massive reporting to clients and I am simply swamped. Excuses, excuses, I know. So without further adieu, let's talk crisis.
Congress finally passed the Paulson Plan. We will call just that, the "Paulson Plan" or rescue package and not a bailout as previously discussed. The fear as of late last week was that perhaps it was too late. Indeed the credit markets are deeply frozen. Student loans thought to be approved, failed to consummate. Some students were sent scrambling as were schools trying to find alternative sources of financing. So much for this being "just" a Wall St problem huh?
As of this morning, the Fed has announced it will begin to buy commercial paper. CP is the lifeblood of commerce as it finances daily operations of most non-financial companies. (We discussed CP here.) After guaranteeing the safety of complying money market funds did not unfreeze the CP market, the Fed will now get active by directly buying CP. Some data show this vital market contracting 10% per week recently.
Europe has edged into trouble as well. A series of financial institution failures in the past week has led Ireland and Germany to guarantee all bank deposits. Recall that in the U.S., deposits are FDIC guaranteed to just $100,000, lifted to $250,000 last week. If you are a business with $5 million cash pile, you are at risk unless you move money to Ireland or Germany. Will this have unintended consequences? Perhaps- as money sloshes across Europe seeking safety, it may destabilize banks without such guarantees.
More concerning is that although Europe shares a currency, there is no central government that can act uniformly across the contintent the way the U.S. Treasury has. Indeed, Germany said it had no interest in coordinated action. This means each country will need to take individual action as the crisis worsens. Some institutions are simply too big for any European government to deal with. This is why several governments had to jointly save a Belgian bank. Ad hoc rescues were not working in the U.S., will they save Europe?
We are well into being concerned about the secondary effects of the crisis. As the Treasury prepares to implement the Paulson Plan (and the latest word is that it will begin buying paper next week), stock market volatility is at extreme levels not seen since the 1987 crash. Take yesterday for example- the Dow had been down as much as 800 points only to finish the day down 370. This is the stuff that causes investors to make great mistakes, lose a lot of hair and reach for the antacid. Keep in mind that monetary authorities are not out of ammo yet as evidenced by the Fed's action to buy CP.
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Well it's about time, I've been eagerly waiting for your update ;)
ReplyDeleteI'm curious about your take on the revised bailout vs. the initial plan submitted by the Tres Dept.
Pork aside, I think I feel better about having some oversight put into the bill, it just seemed like a bad idea to give an executive dept a blank check with no accountability.
I agree that oversight is a good thing, but would add that what the plan needs to succeed is a blank check in the form of discretion to buy anything at any price. Any limits or rules may nullify confidence in the plan's effects, founded or not. Unfortunately this is a situation where we really do have to rely on the integrity of Paulson, the Treasury, the Fed and other political appointees to do the right thing. Also unfortunate is the need to technically overpay for some paper- some of the current prices are absurdly low and paying a fairer value is needed but could be considered "overpaying" by those inclined to view it through an agenda. My hope is that the full $700B is not needed. As mentioned before, it is very possible that bidding by the Treasury jump-starts the market and reprices many securities to reasonable levels. I may also be too optimistic in that regard. Note that the oversight board consists of (and I kid you not): the Fed Chairman, Treasury Secretary, Director of the FHFA, SEC Chairman and Secretary of HUD. At least we can take comfort that if something fishy does happen, there will be hearings and indictments for a decade to come. It will be interesting to see how Hank carries out this mission.
ReplyDeleteOverall I think it is a better bill, but I would have preferred it to pass on Monday.
Anyone interested in the official section by section analysis can find it here.