Thumbs Down on Rescue Legislation

Over the weekend congressional leaders and the White House had reported agreement on a plan involving a $700 bailout of Wall Street, proposed as a public need to keep the general economy afloat. I don't buy it, the people I've been speaking to who aren't bloggers don't buy it either, their general mood is one of anger about it, and 228 house members thought similarly enough that they turned down this initial draft of the bill. I feared that a bill where taxpayers reimburse the recent losses of the financial industry would be rubber stamped, which I am pleased has proven untrue. Naturally, this isn't over yet.

Another $630 Billion Injection from the Fed

One day I'm going to have to sit down and add it all up, but by the running tally, I have around $400 billion of cash injections so far by the Fed into the banking system, in the form of TAFs, PL... and TD..Fs...whatever alphabet soup they list it under. Today it looks like $630 can be added to whatever there was before.

There have been news reports of the LIBOR spread (London Inter-Bank Office Rate) rising, with is the market rate banks lend to one another for short term loans. Historically it is better form for banks to borrow from other banks rather than borrow from the Fed. Usually the LIBOR follows closely the Federal Funds Rate, but now it is taking off indicating banks are cash hoarding and distrustful of the creditworthiness of their fellows. Todays action is intended to unfreeze banks and keep credit liquidity flowing. Like previous bailout instruments from the Fed, it is basically releasing $630 billion in short-term cycling bonds where treasuries are exchanged for securitized debt.

This article gives some figures. Starting with this post of mine from July, we have: TAFs in 21-day cycles at $75 billion; TAFs in 84-day cycles of $25 billion; TLSFs in 28-day cycles of $200 billion; and PDCFs in overnight cycles of around $40 billion. Now, today, adding to that is an expansion of TAFs to $75 Billion in 84-day cycles; and $330 billion to foreign central banks (terms were unspecified in the article, but it's a cash swap of dollars for foreign currency). Pulling out the calculator I get $720 Billion; plus there would have been a pre-existing line of credit to foreign central banks of $290 before today, which totals $1010 billion the Fed has in short term bonds to boost liquidity in U.S. ($390 billion) and foreign ($620 billion) markets.

Please excuse any omissions or calculation errors; the exact details matter less than the point that over a trillion dollars exists in the system, backed by U.S. taxpayers, to keep the domestic and world credit economy on life support.

ADDENDUM [10/6/08]: I don't know how the AP article gets $225 billion for 84-day TAFs. It's $75 billion, and numbers were recalculated accordingly. Calculations will continue to be refined as data filters through the press.

The Death Parade of Giants

Wachovia's turn. Citigroup has just announced it will be cherry picking Wachovia's banking division. I doubt anybody is going to touch the rest of it. We see here again the FDIC's new business model: seize a bank, hand the assets over to a more solvent bank practically for free ($2.2 billion; a pitance considering the value of the retail outlets and deposits), and then declare bankruptcy on what is left. Previous regulatory efforts screwed shareholders but protected bond holders. These latest actions give both the shaft. Depositors are protected, even those with more than $100,000 in an account. WaMu held the record of being the largest bank failure in U.S. history for all of four days. Almost certainly Wachovia will dwarf that.

This marks the second collapse of a bank where I had deposits. My thinking was, the bigger they were, the more likely a bailout, and the earlier this happens in the process, the more systemic capacitance there will be to rescue deposits.

ADDENDUM [10/3/08]: It appears bond holders weren't left to rot, not totally, anyway. As part of the deal the FDIC had agreed to absorb up to $42 billion in bad loans. Today it is up in the air as to whether Citigroup will be acquiring Wachovia with is arrangement, or that Wells Fargo will arrange a private buyout, where bad debt would be shifted over instead to the congressional bailout plan that may be passed later today.

CORRECTION [10/15/08]: So, I guess the word is that Wachovia was not technically a bank failure; but rather was bought out by Wells Fargo (and the tax base who will be covering Wachovia's toxic debt). So, Washington Mutual retains the crown as the largest bank failure to date.

Uh Oh....

This uptick on the base money supply is worrisome and if not a random artifact of the financial turmoil and indicative of a trend it could spell concerns for the value of the dollar. It will be followed here. That said, there are so many deflationary events in play that an expansion of the base money supply was to be expected and will not necessarily mean the dollar is about to tank.

Goodbye WaMu, I Hardly Knew Ye

When JP Morgan acquired Bear Stearns with $44 billion in federal backing, that is what broke the camels back: truth be told that was the spark that started this blog. I hope to squeeze in a retrospective on Bear Stearns one day.

Today, federal regulators seized Washington Mutual and handed operations over to JP Morgan for a firesale $1.9 billion, with an agreement that JP Morgan would raise another $8 billion through stock sales. Reportedly, this marks the biggest bank failure in U.S history (though I don't know about the "stunning twist" remark).

I feel safe now about my little money market fund in WaMu; it's been taken over by a power hitter even among the financial giants.

ADDENDUM [9/27/08]: So... it doesn't look like WaMu was exactly bought out by JP Morgan. It was seized by the FDIC, its assets were handed over to JPM, and now it is filing for bankruptcy such that its debt will be defaulted on.

Goldman Sachs, Morgan Stanley Accepting Deposits

Goldman Sachs (GS) and Morgan Stanley (MS) have shifted from pure investment banking, and now seek traditional deposits. In a sense it is news as this marks an end to investment banking on Wall Street. This article suggests they will be buying deposits from banks taken over by the FDIC.

Mortgage Bailout Bill, Part 2

A more expansive bailout proposal than the last one is making its way through congress, and will no doubt be signed in to law. The key feature is that is authorizes the Treasury to buy up to $700 billion in toxic mortgage securities. Now the prior bailout bill had two major parts to it; one was a mortgage rescue proposal that assisted conversion of adjustable loans to fixed rate at the current price of the house minus 10%; and the other part authorized the conservatorship of Fannie Mae and Freddie Mac such that the Treasury Department could purchase unlimited mortgage securities with T-Bills. If one good thing can be said of this bill it limits such purchases—to $700 billion dollars. At least there is a price on it. But I'm sure that will be expanded as necessary.

This current bill dispenses with any pretense of helping the American citizenry and is squarely a bailout of the banks. The only justification made is to expect really really scary things to happen if it doesn't pass. This is all congruent with my prediction earlier that the shape of the banking bailout would be the Treasury department exchanging T-Bills for problematic mortgage securities. If banks can chuck mortgages so easily one wonders how motivated they will be to participate in the rescue part of the first bill.

Anyway, this bill isn't passed yet so discussion of the details will wait until then.