Today’s big news:
- The Fed becomes a buyer in the commercial paper market
- Fed talks of lowering rates
- FDIC talks of doubling deposit insurance premiums
- Regulators put forth proposal to reduce risk weight to 10% for Fannie and Freddie
- Consumer borrowing drops for first time in decade
- Lehman CEO gets knocked out by disgruntled employee
Fed buys CP
The market has been so volatile that seeing the Dow Jones average down 200 points almost doesn’t register as out of the ordinary. Someone asked me this morning how things were going and my response was that everything seemed good to go…the Dow was only down 200 and the 10-year was trading at a 3.43%. As soon as the words escaped my mouth it hit me that times are changing when that seems normal.
Today is another news filled day in a long string of such days. Today we have some items of substance to chew on. The day began with Bernanke telling us that the Federal Reserve will now be a buyer of commercial paper. In a move sure to entertain the acronyms anonymous meetings around the world we have yet another government program to add to the list. This one is called the CPFF, or Commercial Paper Funding Facility. You KNOW the government is getting bigger when they are cranking out 5 new acronyms a month. I’ve never calculated the number but it wouldn’t surprise me if the average were 150 new government employees for each letter in each new acronym.
So back to the CPFF. Here is the definition provided by the Feds website:
http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm
“The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants.”
The commercial paper market has been under a tremendous amount of pressure over the last month. Many of the money market funds that live in the commercial paper markets abandoned ship and jumped into Treasuries when they experienced runs on their funds in the wake of Lehman’s collapse. This group led the charge to the short end of the Treasury curve and continues to keep yields depressed. The 4 month bill is currently trading at 30 basis points.
Fed hints at rate reduction
“`In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate,'' Bernanke said in a speech in Washington.
The Fed is currently pushing more than $1 Trillion into the markets via overnight loans to provide liquidity and here I sit looking at a Bloomberg that is telling me Fed funds are at 5% and Libor is still well above 4.00%. The trend with the Feds repo’s has been that the Fed Funds effective rate is elevated early in the trading day but over the course of the morning it drops below the target rate or lower. Today it hasn’t dropped.
Despite the Fed doubling its international operations and pumping $620 billion into that market…Libor remains elevated. Banks are hoarding cash…and who could blame them. This entire problem was kick started by sub-prime lending…or lending to people that probably won’t be able to pay you back. I think it’s a bit naïve to ask banks to continue playing that game on a grander scale and make unsecured overnight loans to each other when titans of finance are dropping like flies. Who knows if your counterparty will be around tomorrow? If you can’t answer that question then why would you lend to them?
The Fed Funds futures market is pricing in a 100% chance of a 50 basis point cut at the October 29 FOMC meeting. You’ll see that there is a 100% cut with 70% probability place on AT LEAST a 50 bps cut, the remaining 30% probability is placed on a 75 bps cut.
The chart below shows how the market is pricing the odds of rate changes over the next three meetings.
FDIC action
The bullet points below are from the FDIC’s proposal to raise deposit insurance premiums. The FDIC expects the increased insurance premiums to add $10 Billion annually to its fund.
· The FDIC projects that bank failures from 2008 to 2013 will cost the deposit insurance fund $40 billion, a number that includes the estimated $11 billion incurred so far this year. For the $40 billion, the FDIC says “there is a considerable degree of uncertainty surrounding these projections.”
· The FDIC projects total losses to the deposit insurance fund to be roughly $12.8 billion for 2008, which suggests the FDIC expects its fund to lose another $1.7 billion this year.
· The FDIC projects that its insurance fund, which was 1.01% of all insured deposits at the end of the second quarter, could fall as low as 0.65% early next year. The FDIC’s goal is to build the fund back up to 1.26% of insured deposits by 2013.
· There are 14 banks in the FDIC’s highest risk category, category 4, but the FDIC wouldn’t name them. These banks hold a combined $29.1 billion in domestic deposits.
· There are 723 banks and thrifts, a little less than 10% of the industry, in risk weight categories 2, 3 or 4. These banks hold roughly 13% of the nation’s deposits.
· The proposed premiums would result in pre-tax income for next year falling 5.6% for the banking industry.
Lower the Risk Weight
Regulators have put forth proposals that would lower the risk weighting of Fannie and Freddie issues to 10% from 20%.
From my Strategies group:
In a Notice of Proposed Rulemaking approved by the FDIC Board today and to be published in the Federal Register soon, the banking regulators have proposed changing the risk weighting on senior debt, subordinated debt, and mortgage guarantees of Fannie Mae and Freddie Mac. The rule, if approved in final form, would not take effect until the 12/31/08 reporting date. The risk weight would remain in effect as long as the treasury’s Senior Preferred Stock Purchase Agreements remain in place.
We will have a Strategic Insight bulletin on this later today.
Consumer borrowing drops
The amount of money borrowed by US consumers has been tracked by economic data series since 1943. August saw the first drop in this series in over a decade. Consumer spending is roughly 2/3’s of GDP and it is beginning to throttle back as loans are becoming harder to come by.
Lehman CEO gets KO’d
Today’s lesson in corporate etiquette comes to us from Lehman CEO Richard Fuld. It’s important for the aspiring Wall Street CEO’s out there to remember that if you run your company into the ground and in the process force thousands of your hard working and loyal employees into the unemployment line, destroy significant sums of their personal wealth, and ruin their dreams of retirement then you probably shouldn’t continue working out in the company gym.
A week after the company announced bankruptcy CEO Richard Fuld was walking on a treadmill in the company gym and a fellow employee walked up, punched him square in the face and knocked him out cold. No standing eight count…out cold.
Those are the big stories from today. If you have any questions or if there is anything I can be doing for you just let me know.
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