Posted by January 28, 2009
Let’s see, what has happened since I became Staff Coordinator of the NY Fed’s money market desk? In no apparent order, stress continued to build in the banking sector and the US government now has two institution specific facilities to support both Bank of America and Citibank, each of which provides a layer of loss protection for hundreds of billions of dollars of assets. Bank of America’s stock price has fallen as low as $5.00 a share, it was trading around $33.00 when they acquired Merrill Lynch over the “Lehman weekend”. Thank goodness B of A did not pay cash for their purchase of Merrill or they would have even less capital / would need more support. Staying with Merrill for a minute, they just fired their “new” CEO, who must be thinking, “what a long, strange trip it’s been.” The previous CEO, Stan O’Neal, lost so much money for the firm it should be criminal.
The United Kingdom looks like its approaching complete meltdown. The market finally woke up the fact that RBS and Lloyds have severe asset quality problems – even though they are both already majority owned by the government, their share prices dropped precipitously in January. Hmmm. Barclays has not taken “bail out” money from the UK government but they are taking money from the United Arab Emirates. This latest deal seems to have an anti-dilution clause that may hinder them from raising capital in the equity markets in the future, but I guess they’ll cross that bridge if / when they come to it.
Of course, financial stress can always be worse, unless you are the country of Iceland. They have just basically thrown in the towel and asked for IMF money, not to “bail out” their banks, which they can’t afford to do, but to make “cents on the dollar” payments to the holders of their bank liabilities. Apparently, the whole country is resigning itself to a becoming a barter economy and fish will be the main food source. Next sovereign to enter the financial crisis vise will likely be Ireland. The so called “Celtic Tiger” has guaranteed all of its bank liabilities and nationalized most of its banks. The problem is the banks were bigger than the country.
Meanwhile, back in the states, it’s kind of scary to be at the helm of the Domestic Money Markets division. In the December 2008 FOMC meeting, the Fed made an historic change and set the policy target “rate” to be a “range” of between 0 and 25 basis points ( 0 – 0.25%). If you can’t have the target rate you want, than set the target rate to what you have, or something like that. Finally, Tim Geithner, ex-President of the NY Fed, was confirmed as the US Treasury Secretary serving in the new Obama administration. I have nothing but utmost praise for President, now Treasury Secretary, Geithner.
February 7, 2009
Treasury Secretary Geithner is scheduled to give a speech before Congress next week to present a “Comprehensive Plan to Resolve the Financial Crisis” – sounds great, fingers crossed. The pressure on the people who are helping put that together must be close to unbearable. I hope they present a plan that will facilitate “price discovery” via auctions of the bank assets that are way under water, but I’m not saying I have the answer. The “ring fence” approach that the government is providing Citibank and Bank of America seems to be working, so perhaps that paradigm will gain more traction at the speech. Many European countries have guaranteed their banks’ liabilities and the thought of the US nationalizing banks doesn’t seem like a far-fetched idea anymore.
On a technical front, FRBNY is close to putting together a new facility, the Term Asset backed securities Lending Facility, or TALF for short. This facility will lend money to investors to finance the purchase of asset backed securities, subject to certain conditions, etc. To make a long story short, the facility will provide financing / leverage to an area of the market that has none which should help stabilize prices and help provide that price discovery that I just referred to. Since TALF will create electronic money, DMM was going to administer the facility, but we’ve changed our minds on that. We think it would be a bad precedent to subject DMM to an audit by Treasury (violates that central bank independence principal) so another area within FRBNY will literally conduct the TALF auctions and they will be specifically audited by the Special Inspector General for Treasury’s Troubled Asset Relief Fund.
February 18, 2009
Mr. Geithner spoke before Congress last Tuesday and the market spoke as well – equity markets were down about 5% across the board during the speech. The reason for the disappointment with the “comprehensive plan” was… people didn’t really hear any details about a plan. Instead, the Treasury Secretary more or less provided an outline on what a plan might look like. At least he discussed the topic.
The equity market had another large down day yesterday, the first day back from the President’s Day holiday weekend – down about 4.0%. What is kind of annoying is that the market appeared to be reacting to a report from a rating agency stating that central European banks, such as Erste based in Austria, have a lot of potential loss exposure from loans that were made in Eastern Europe. Fair enough, but market participants already knew that. So, wy was the market down 4.0% today?
There’s some talk in the market now about the prospect of the US actually nationalizing some of the very large banks. I read some reports that claimed the groundwork has already started happening, which I don’t know, but there have been several large bank mergers that look “directed”, i.e. Wachovia is now part of Wells Fargo, Washington Mutual is part of JP Morgan Chase. The big concern, of course, is both Citicorp and Bank of America, whose share prices are currently around $3.00 and $5.00, respectively. Bank analysts are tracking the market prices of preferred equity shares issued by those two banks for clues on nationalization prospects on the theory that these shares will likely have only two values: close to par (bank solvency issues get resolved in an orderly manner without much further government assistance), or near zero (they do not). Guess which end of the spectrum these shares are currently trading closer to? You guessed it, zero L. The other thing gaining some traction is that Citibank’s ATM withdrawal fee of $3.00 is now equal to their share price, indicating that something is wrong somewhere.
Other major developments include the passing of a deadline for US auto companies to submit plans for government assistance under the TARP program. GM says it needs $16 billion, Chrysler wants $3 billion. The President and his Treasury Secretary have also provided more details on their plan to help the mortgage market. One of the steps involves “investing” another $100 billion into our old friends, Fannie and Freddie. $100 billion here, a $100 billion there, eventually it starts to become real money ;-). The plan also tries to standardize mortgage modifications with the intent of helping people stay in their homes and reducing foreclosures. Trouble is, bankruptcy judges still have a lot of leeway to interpret the appropriate course of action in each specific situation, so it’s hard to achieve “standardization”. Congress did just pass an $800 billion stimulus package, and do we ever need it!
February 23, 2009
The stock market rallied big time today, up about 3 ½%. The trouble is the market fell by that much. . . . yesterday! It’s hard to believe but we really seem to be in some sort of infinite feedback loop of Murphy’s Law, if something can go wrong, it will. It’s also known as the Law of Unintended Consequences.
Treasury Secretary Geithner is trying his best to calm market jitters and let market participants know that there is a backstop. The trouble is, a lack of clarity on what the backstop is and how it would work is making people . . . . NERVOUS! Treasury plans call for “stress tests” of financial institutions to make sure they have enough capital to withstand this difficult economic environment. Details are to be released tomorrow. Given the market’s reaction the last time Tim Geithner spoke before Congress, I’m a little apprehensive. Hopefully the stress tests plans will disclose enough details so that the market feels comfortable that long term solvency issues are being addressed. The bad scenario is not enough information may encourage short selling of the banks that are perceived to potentially fail the stress test.