The US Government is set to undertake the largest expansion of power over the financial system since the Great Depression. The “Great Depression” comparisons are piling up like promises in an election year.
It will take days and maybe weeks to get all of the details on what the Treasury has planned but clearly they aim to bring a big hammer to this problem. They do not want this problem to fester and they are going to take action on a scale we may never see again in our lifetimes. In Paulsons words this package will entail “hundreds of billions of dollars”.
It will take days and maybe weeks to get all of the details on what the Treasury has planned but clearly they aim to bring a big hammer to this problem. They do not want this problem to fester and they are going to take action on a scale we may never see again in our lifetimes. In Paulsons words this package will entail “hundreds of billions of dollars”.
A very brief review is in order here. In the last year it became apparent that if you lend to people who don’t have the money to pay you back…they generally won’t. Mortgages made with poor underwriting standards first took down two Bear Stearns hedge funds, then they took down Countrywide, then they took down Bear Stearns itself, they crushed Lehman Brothers, brought Fannie and Freddie to their knees, forced Merrill Lynch to the negotiating table, killed AIG, are about to kill WaMu, might take out Morgan Stanley and crushed too many smaller banks to list.
So that leads us up to this week. The cancer spread to new areas this week as Lehman’s bankruptcy delivered a blow to some money market funds that they can’t recover from. The snowball of funds breaking the buck started with the Primary Reserve Fund earlier this week. We reported on this and gave everyone a heads up to check their exposure. A $22 Billion Bank of New York institutional money market fund was the next to break the buck, then Putnam Funds shut a money fund down, then another broke the buck. In one day investors pulled $89 Billion from money market funds. This massive liquidity drain was only going to bring further pain to a market in the middle of a record liquidity crisis.
Paul McCulley of PIMCO says “It’s the ultimate nightmare to have a run on the money markets—that is truly the Armageddon outcome—and they’re not going to allow that to happen”. The Treasury will insure money market funds for one year for those that pay a fee to enter the program.
There is broadly based political support for the plans that the Treasury and the Fed have come up with. All legislators say they expect a very quick passage of these packages. Barney Frank said they will act on the plan within two weeks. Additionally he said he hoped it would include another stimulus package with money for Medicare and infrastructure…but no money this go round for US families. Some are beginning to question whether the US Government has deep enough pockets to handle this problem.
Clearly the purchase of garbage assets from investment houses and banks poses some serious questions regarding the price at which those assets are valued. We eagerly await more details on that.
Lawmakers are saying at this early stage that this ultimately won’t cost the tax payers a lot. They’ll have to forgive me for being skeptical.
Below is a quick list of facts and points for consideration:
- Treasury tapped all $50 Billion in the country’s Exchange Stabilization Fund to insure money market deposits. This fund was used in 1990 to bailout Mexico and is one way Paulson can act without the consent of Congress
- Officials are considering an $800 Billion fund to purchase “failed assets” and a separate $400 Billion pool at the FDIC to insure investors in money market funds…$1.2 TRILLION total under consideration there
- Treasury has pledged to buy up to $200 Billion of Fannie and Freddie stock earlier this month
- Fed recently gave AIG an $85 Billion loan
- Treasury previously committed to buy $5 Billion of MBS debt for this month
- Goldman Sachs increased its estimate for the 2009 US budget deficit to $565 Billion from a prior estimate of $465 Billion
- The Congressional Budget Office estimates the 2009 deficit at $438 Billion, up from prior of $407 Billion
- 4th Quarter GDP estimated at 0.55%
- SEC announces a ban on short sales of 799 stocks through Oct. 2nd
- UK puts similar restrictions on short sales
- WaMu had 22% of its float sold short
- Analysts are calling this the “mother of all short squeezes”
- 2-year Treasury notes fell the most in 23 years
The market’s reaction to these plans has been dramatic. The Dow is up almost 400 points and every spot on the Treasury curve is up in yield. The market’s perception of this plan could change dramatically as more detail comes out. If you were waiting on a pullback to put money to work…now might be the time.
The market’s reaction to these plans has been dramatic. The Dow is up almost 400 points and every spot on the Treasury curve is up in yield. The market’s perception of this plan could change dramatically as more detail comes out. If you were waiting on a pullback to put money to work…now might be the time.
An astute point was made this morning regarding the timing of this massive plan…who’s going down this weekend?
We’ll keep you up to speed as this develops.
Market reaction is below:
Stocks are up strong. Treasury yields are up along the entire length of the curve. Fed Funds effective rate is in line with the target rate early in the day which is a huge sign that we’re seeing enough liquidity in the short term borrowing markets.
Fed Funds futures are indicating that the market has mixed feelings about these developments and that those feelings are cautiously optimistic to negative.
To highlight just how much volatility we’ve seen in the last few months I’ve attached a graph of the 10-year Treasury yield from March of 2008 to this morning. It’s been a wild ride and that might continue into 2009.
If you have any questions or if there is anything I can be doing for you just let me know.
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