Fed Fails To Halt Debt Meltdown

[Joanne98]

In yet another attempt to to halt the global debt meltdown now in progress, the Fed Lowered the Discount Rate and Expanded Lending to Primary Dealers in an emergency weekend meeting.


In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent.

The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.

Opening up lending to firms other than commercial banks represents a shift in the Fed's 94-year history.

"It is a serious extension of putting the Federal Reserve's balance sheet in harm's way," said Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington. "That's got to tell you the economy is in a pretty precarious state."

"We learned that Bear Stearns's balance sheet on close examination was worth a 10th of its market value," said Reinhart.

"Clearly, the Fed is trying to provide more liquidity to prevent a more vicious cycle and race to the bottom," said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco, which oversees $200 billion. "The problem is there's so much concern about credit quality that now there are solvency issues, and it's something the Fed has a more difficult time dealing with."

Yesterday's events are "nothing like the 1970s, which was about fighting inflation," said David M. Jones, a former New York Fed economist. "This is fighting a negative, self-reinforcing process" of sliding collateral values, tighter bank credit and weakening of economic conditions, he said.
Nothing Like The 70's

Nothing like the 70's is right. Here is proof.

Yield Curve As Of March 16, 2008


Are short term interest rates at 1.16% (and falling) indicative of stagflation? Certainly not. You can kiss stagflation theories goodbye on the basis of the above chart. Somehow the myth persists.

Primary Dealer Credit Facility

Here is the Federal Reserve press release announcing the Primary Dealer Credit Facility.

The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally.

The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral, including all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available.

The PDCF will remain in operation for a minimum period of six months and may be extended as conditions warrant to foster the functioning of financial markets.
Facility Failures

The TAF (Term Auction Facility) failed to restore liquidity.
The TSLF (Term Securities Lending Facility) failed to restore liquidity. See The Fed's Swap Meet for more on the TSLF.
The PDCF (Primary Dealer Credit Facility) will be the next "facility" to fail.
Bear Stearns Implodes

The Fed's emergency weekend actions above are all part of a failing effort to contain the fallout from the demise of Bear Stearns. On Friday Bear Stearns was worth $30 a share. Sunday evening Bear Stearns was worth $2 a share as PUT Buyers Celebrate Bear Stearns' Demise.

However, to get JPMorgan to commit to the deal, the Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

The stated book value of Bear Stearns last Friday was $80 billion. My quick math shows the actual book value of Bear Stearns was as little as -$28 billion taking into account Fed guarantees. That should put some new meaning to the term "Marked To Market".

Think all that debt on the books of Lehman (LEH), Morgan Stanley (MS), Goldman Sachs (GS), Citigroup (C), Merrill Lynch (MER), Bank of America (BAC), etc., is worth what is claimed? Think again. More revaluations are coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

[RainDog]

1. the brit show on cnbc last night

kept mentioning Lehman as a firm that was pretty wobbly. they worried, on air, between creating a scare and giving viewers information that was already out there so they could make decisions.

this guy on now says buy defense industry stocks because they're the safe places right now... we really don't need an arms bubble...

you know, that guy that lost a billion, on paper? Joe Lewis. Imagine if he'd taken that money to start up small-scale local energy suppliers... I mean, the money is simply gone. Wouldn't it have been nice if some of it had done something useful for the U.S. economy, rather than simply bump his bank account?

[Tansy_Gold]

8. This is the thing that bothers me, drives me crazy

He lost "a billion" but he lost it "on paper." THAT MONEY WAS NEVER REALLY THERE, WAS IT????

The money that IS there is the $30bn that's being sucked out of the Treasury (if there's anything really left there) and poured down the BS rathole right into the pockets of the JPMC stockholders. THEY have no risk, but THEY will reap all the benefits. Meantime, the wageslaves who are paying real taxes into the real IRS are funding this madness and worrying if their paltry 401k will last another ten or twenty years (or in my case, ten months) and if social security will be there when they retire because there aren't enough jobs to go around to keep everyone fully employed and therefore no one can actually SAVE for retirement (which is a concept that will probably also fall to the ravages of economic collapse).

I need to go cut some rocks before I completely lose my mind over this.


Tansy Gold

[Hugabear]

2. Don't expect anything good to happen as long as * is in power

That fucking asshole couldn't stop a leaking faucet, let alone the US economy.

[reprobate]

5. This ol' Florida cracker thinks Bush is a symbol, not a cause. He's a figure head

for the very rich that pull his strings. It's their attitudes that have put us and most EVERY investor in such a bad place. Being the leaders their attitudes are copied by others.

Used to be when you made an investment you engaged in an exercise of risk management. You weighed the return against the possible risk of losing and made your decision like an adult. If you can't afford the loss you don't take the risk.

Now the greedy children are in charge. Risk don't mean a thing. Only profits count. Don't even think about losing your investment - the Big Boys say you won't lose a thing.

Just look at the greed involved every step of the way that got us into this mess. Grown ups should have known better. At the base of this shit pyramid is the home buyer who should know (and probably does) that with his/her income and debt taking on more debt is taking that extra step off the cliff without a bottom. And he/she probably borrowed more than the present value of the home - markets always go up, right? - and spent the balance on short term 'keep up with the jones' crap. He/she bought the mortgage from the broker who HAD to know that the homeowner couldn't really afford to repay the mortgage without falling into financial trouble, but he didn't care about the homeowners risk cause the broker is at no risk. He just turns around and sells the mortgage - but first he takes his commission and fees.

Then there's the appraiser. He's at no risk at all so he values the home at whatever the broker tells him to. If he doesn't he won't get any more fees from the broker. No-he has one risk. His conscience. But they are in short supply in a rising home market.

Next step? The aggregater who bundles all the mortgages together. Supposedly, he minimizes risk by bundling some low risk mortgages with some high risk. In reality he truly doesn't know which is which, but he takes his fees anyhow.

Then he sells the bundle to the investment banker who is at no risk because he uses it to lure investors into giving him money for this "security". And everyone sits there fat, dumb, and happy. Until the bubble bursts. Then EVERYONE gets hurt. The homeowner loses his home. The appraiser has no more homes to appraise. The mortgage broker can't sell his mortgages to anyone. The aggregator has nothing to aggregate. And no one invests in the investment bank. So everyone loses. Everyone, that is, except for the one entity that bails out the rest of the pyramid. The Federal Reserve Banks. More specifically, the owners of the stock of the Federal Reserve Banks and in particular the New York Federal Reserve Bank owners.

Read this article, then Google "Federal Reserve Bank Ownership".

To quote from the article:

"Who Owns the Federal Reserve Bank of New York?

Each of the twelve Federal Reserve Banks is organized into a corporation whose shares are sold to the commercial banks and thrifts operating within the Bank's district. Shareholders elect six of the nine the board of directors for their regional Federal Reserve Bank as well as its president. Mullins reported that the top eight stockholders of the New York Fed were, in order from largest to smallest as of 1983, Citibank, Chase Manhatten, Morgan Guaranty Trust, Chemical Bank, Manufacturers Hanover Trust, Bankers Trust Company, National Bank of North America, and the Bank of New York (Mullins, p. 179). Together, these banks owned about 63 percent of the New York Fed's outstanding stock. Mullins then showed that many of these banks are owned by about a dozen European banking organizations, mostly British, and most notably the Rothschild banking dynasty. Through their American agents they are able to select the board of directors for the New York Fed and to direct U.S. monetary policy. Mullins explained,

'... The most powerful men in the United States were themselves answerable to another power, a foreign power, and a power which had been steadfastly seeking to extend its control over the young republic since its very inception. The power was the financial power of England, centered in the London Branch of the House of Rothschild. The fact was that in 1910, the United States was for all practical purposes being ruled from England, and so it is today' (Mullins, p. 47-48).

He further commented that the day the Federal Reserve Act was passed, "the Constitution ceased to be the governing covenant of the American people, and our liberties were handed over to a small group of international bankers" (Ibid, p. 29)."

So I say again, Bush is only a symbol. He doesn't give orders, he just passes them along.

And I ask anyone who knows: where have the grown ups gone and why did they cede control of the world economy to a small group of very, very rich folks who give not a shit about the rest of us? They are the only ones to show a profit out of this shit storm.

A little bit of every dollar that is spent in the economy goes into their pockets. Add up trillions of 'little bits' and pretty soon you're talking about some serious money.

But the old maxim still holds: when you use a stick to stir up a shit pile, you end up with a shitty end and a clean end. You and I are holding the shitty end as usual. And the Fed owners - again as usual - are holding the clean end. And raking in the coin as they smile happily and pity the poor plebes who don't know any better.

I got a better deal for the rest of you. Invest in Florida swampland. We got plenty of it here in the sunshine state. You can build real nice homes on it if you bring big enough pontoons. But you better hurry before the developers fill it in, pave it over, and build all those little ticky tacky boxes on it.

[Warpy]

3. Here's an interesting article about the Minsky Moment

that some analysts have actually mentioned on the teevee in the past couple of days. It will explain what happened to Bear Sterns and why they failed and why Lehman and Citibank will probably need equivalent bailouts in the future.

http://alamedalearning.com/reality/2007/07/29/minsky-has-his-moment/

[Joanne98]

4. Thanks Warpy

[A HERETIC I AM]

6. Not trying to be picky here, but the graph in your OP is not the yield curve.

Here's the one in the article;



The one you pulled from the Photobucket account has to do with investor emotions through the economic cycle.

[sbyte]

7. k&r good thinking, and research, to the point.