Fed To Buy Commercial Paper

The panacea du jour (I don't know what it is but we have one every day):

Fed Moves to Thaw Credit Markets

By Steven Mufson and Neil Irwin
Washington Post Staff Writers
Tuesday, October 7, 2008;  9:31 AM

The Federal Reserve said today it is establishing a special fund to lend money directly to businesses so they have adequate cash to operate, a major move by the central bank to ensure that "main street" companies are not crippled by the financial crisis gripping Wall Street and other money centers around the world.

Under the new program the Fed will buy up commercial paper, the short term debt that large companies around the country use to fund their day-to-day operations. That puts the Fed in the unprecedented position of, in effect, funding individual companies by buying their debt.

The "Commercial Paper Funding Facility" will be a special entity, funded by both the Fed and the Treasury Department, that will purchase three-month notes issued by corporations. It will include debt backed by specific assets, but also will make unsecured loans. Entities that sell unsecured debt to the new entity will have to pay a fee to account for the higher risk.

After a day of sharp losses, Wall Street market futures turned higher on hopes that the Fed announcement will help ease a credit crisis in which banks and financial firms have become hesitant to lend, and companies have worried about raising the money needed to pay their bills.

This should be one of many useful steps.  The article then mentions the possibility of a global rate cut:

With the financial crisis now engulfing most of the developed world, a meeting scheduled for later this week in Washington of the International Monetary Fund and World Bank will probably turn into a summit that could provide a forum for coordinated action.

...

Another step the Fed could take to try to jolt the financial system out of its current torpor would be to cut its target for short-term interest rates. The federal funds rate is currently 2 percent, and many financiers on Wall Street argue that an emergency rate cut, as early as today, would help the situation.

As recently as last week, there was no consensus at the Fed on whether additional rate cuts would make sense. Some leaders of the central bank worried that they would not serve their intended purpose of stimulating the economy as long as the credit markets were clogged. They feared that a rate cut could cause the dollar to drop and commodity prices to rise.

But in recent days, as the financial crisis has become more severe, an emergency rate cut, perhaps coordinated with other large countries, has become more plausible. Fed Chairman Ben S. Bernanke is set to deliver a speech today that will indicate his current thinking on rates.

I think a rate cut is unlikely to be effective - as I understand the current situation, there are plenty of willing borrowers at current rates but banks are unwilling to lend.  Lowering the target funds rate will simply draw in more prospective borrowers to whom lenders will say 'no'.

And a rate cut that does not improve liquidity will be worse than neutral - visibly ineffective flailing by the world's central banks will inspire fear rather than confidence.  That said, the European Central Bank should have stopped worrying about inflation and cut rates last summer.  Leaving the where - poised for an ineffective make-up cut now?  Groan.

Comments

[Pofarmer]

So, we passed the bailout, and the govt STILL has to buy short term paper anyway??? I think some folks were suggesting this in the first place, as an alternative to the bailout. Like I pointed out in another thread that nobody commented on, Fed Reserves went up by 10's of billions leading up to the "liquidity crises." Apparently the parties still don't want to lend money. Funny, that.

[Pofarmer]

Chickens with their heads cut off comes to mind here.

[clarice]

Have we used any bailout money yet? Is is sitting on the sidelines while the govt appoints someone to run it and figures out rules for managing it? And isn't this an interim step ? If so, perhaps the bailout is like the money in Mama's bank account in I Remember Mama--something she talked about so the kids wouldn't realize how precarious their situation was and contine on to success?

[Pofarmer]

Bringing part of Ricks comments forward

The banks will go broke if they leave their cash for very long with the Fed at .5% annual rates so this is definitely a "bridge" maneuver.

And going broke this way is an improvement over the way they were going broke before?

I hope it's a bridge, I don't see it being long term, at least I certainly hope not. The big commercial banks have to be taking hit's in big chunks of their portfolio's and that ain't helping any, either.

[Rick Ballard]

Reposted - I had this as OT on another thread because this post had not appeared.

TM requested a metric for success for the Paulson plan. I suggested that watching the rate interplay in the Treasuries market would be a very simple way in which to do so.

The Fed intervention in the commercial paper market makes the use of the measure a bit problematic. What the Fed is doing is very interesting. Banks won't lend because, having sat on a very hot stove, they refuse to sit on any stove. So the Fed is paying them interest (very low interest) on money deposited with the Fed by the banks and taking their place on what may be either a hot, cold or Goldilocks warm stove.

If you see the term "taxpayer bailout" in conjunction with this move by the Fed, remember that it is at least partially (as in 80% or so) incorrect. The Fed is taking in deposits by banks which lack the confidence to make a correct assessment regarding risk and then loaning it out in the banks place. The banks will go broke if they leave their cash for very long with the Fed at .5% annual rates so this is definitely a "bridge" maneuver.

The financial press is failing abysmally in providing important information to the general public. The results of the Fannie Mae CDS auction, establishing 92% of face value as the market for low quality Fannie Mae issues is a pretty positive signal as was Wells Fargo's valuation of very low quality Wachovia paper at 74%. The auction of Lehman paper on Friday, in conjunction with the Fannie Mae auction and the Wells valuation will have 'floored' the market on over $1 trillion of MBS. The Wells offer in particular should be of signal importance to companies with a lot of Level 3 paper. They are now free to argue at length with their accountants concerning 'mark to market' valuations with over $300 billion of Wachovia paper having actually moved.

[tp]

They would be better off raising rates. There is a huge demand for money, but nobody will loan it. Why does anyone think that lowering interest rates will make banks more willing to loan money? All it would do is reprice loans and effectively squeeze the spreads the banks are currently earning. The banks need a higher spread on the money to loan more money. My guess is that bank borrowing costs will not really go down if the Fed lowers key rates, unless the Treasury forces investors to either take negative interest rates on Treasry debt or loan their money elsewhere.

[Charlie (Colorado)]

Have we used any bailout money yet?

No.

Is is sitting on the sidelines while the govt appoints someone to run it and figures out rules for managing it?

Yes. In fact, today I read it may take 4 weeks before they make their first purchases.

And isn't this an interim step ?

Yup.

If so, perhaps the bailout is like the money in Mama's bank account in I Remember Mama--something she talked about so the kids wouldn't realize how precarious their situation was and continue on to success?

Possibly, but it also means there is money behind the illiquid securities, so over time it should filter out. The thing about using just this strategy is that it addresses the effect --- the credit freeze --- but not the liquidity which is the underlying cause of the freeze.

Larry Kudlow was talking a lot about money supply yesterday; M1 is going up quite a lot, which should be a good counter to the deflationaries recently.

By the way, it's worth noting that this is not only not costing the Fed anything, it should actually make money. No taxpayer impact.

[Pofarmer]

Rick. Let's look at this another way.

The Fed paying interest on deposits seems EXACTLY the opposite of what they should be doing. They want to encourage banks to loan money, correct? So they contemplate a rate CUT???? In what universe does this work. If banks are reluctant to loan money becuase of percieved risk, then the answer is that rates need to INCREASE to account for this risk. In that case, the Feds taking paper on their own is EXACTLY the wrong thing to do, as it puts the money lower than were the commercials want to lend it. Now, and I think this is the deal. The Fed knows that there are tons, and I mean billions, of CDS written as "interest rate swaps" out there, and they are trying desperately to navigate that minefield, while trying to restart the credit markets. Torches and pitchforks for the guys that came up with CDS is in order.

[Charlie (Colorado)]

The financial press is failing abysmally in providing important information to the general public.

Boy, ain't that the truth. To be fair though, if there's anything I think we've learned in the last three weeks, it's how little understanding of finance there is among the general public, and how vigorously even very intelligent members of the general public will defend their "common sense" against all efforts at education.

[Charlie (Colorado)]

I think you're on the wrong side of the fence there, Po. If the Fed cuts interest rates, they're saying they're willing to sell new money for less; it's a cost to the banks. (That's not strictly true, but I think it's effectively the case.) So it should make banks more willing to lend, because it makes their margin better.

[TCOisbanned]

We have had very little quantitative or even detailed qualitative rationales for actions so far (and remember that the interventionists who think they can improve on the market's functioning, were not so astute as to predict the market).

For instance, how exactly are businesses "not being able to borrow for payroll" (which seems to be one of the big boogeyman running around with no facts behind it)? How many businesses require this type of credit to function? How many are now being denied credit versus a few months ago (and how does this compare historically, for instance to non-bubble periods, normal recessions, etc.) How much has the spread (interest charged) for such credit changed? How much is it an issue of not getting credit at all or just paying an extra percent?

Until we start THINKING, we will keep flopping and twitching and wasting money while acting like we need to ride herd over a natural market of supply and demand.

I feel like the anti secret society guy in STOVER AT YALE, telling the hero, eventually...you will stand with me.

[cathyf]

By the way, it's worth noting that this is not only not costing the Fed anything, it should actually make money. No taxpayer impact.

Well, sure, but there is some tunnel vision there. The huge elephant in the room is tax receipts. The banks and Fannie and Freddie have been paying gobs of taxes on all of their profits. The employees have been paying gobs of taxes on their incomes. Homeowners have been paying capital gains taxes when they "flipped this house." Money that simply moves from one place to another is still going to get taxed, and for the taxpayer it's a wash. But wealth is both created and destroyed; and anything that destroys a lot of wealth will hit tax receipts hard. That's the real bottom line question...

[steve sturm]

The Fed can huff and they can puff and nothing they will do will work... because as long as the media keeps pushing negativity down our throats, the public/markets will not respond positively to anything the Fed does (bailout, takeover, low interest loans, buying commercial paper).

But there is hope, things will turn around, and not too far in the distant future. And I can even predict the exact day the economy will start to turn around.... click here if you can't stand the suspense of not knowing.

[Crunchy Frog]

That would be November 5, 2008, with another spike upward on January 20, 2009.

[Charlie (Colorado)]

We have had very little quantitative or even detailed qualitative rationales for actions so far ....

That is among the seven or eight silliest things I've ever seen in print.

[Charlie (Colorado)]

Hey, folks, do you know where (if anywhere) I could find the commercial paper bid-ask sizes?

[Barney Frank]

They would be better off raising rates.

To raise rates they have to remove liquidity from the system.
One of the causes of the depression was a tight money supply which is the result of removing liquidity.
Bernanke is not likely to repeat the mistakes which led to the depression, which doesn't mean he won't make, or hasn't already made, some new ones of his own.

[Topsecretk9]

John Conyers wife, Monica, pulls a fast one and shakesdown Detroit to pay settlement in lawsuit against her for using her staff to do personal thing on taxpayers dime

[Rick Ballard]

Charlie,

The Fed stats have daily volume tucked away at the bottom. That doesn't answer your specific question but there is a lot of data in there from which something might be interpolated.

[Pofarmer]

Hey, folks, do you know where (if anywhere) I could find the commercial paper bid-ask sizes?

I don't know about bid ask, it's probably not currently public because that has been private transactions to this point. However, one of the links Rick or Gmax gave, yeah, I know that's kind of vague, listed the commercial paper that the Fed had already purchased as of Sep24th. So, basically, this is nearly 2 week old news.

[Pofarmer]

To raise rates they have to remove liquidity from the system

It seems to me that one of the problems is that the system has been awash with credit. Major corporations can't go a week or a month without selling paper? I don't know that you are going to solve solvency issues brought on by too much credit by adding more credit. If the returns aren't there, you just dig the system deeper in. Been there, done that.

[SWA]

Five year emergency sustainable budgets and loans for development that we write off as grants. The five years can renewed just before the Presidential elections.

[clarice]

"Possibly, but it also means there is money behind the illiquid securities, so over time it should filter out. The thing about using just this strategy is that it addresses the effect --- the credit freeze --- but not the liquidity which is the underlying cause of the freeze."

I didn't mean it was a bad thing to let people know the calvary was ready and suiting up. Chaco. But in I Remember Mama, just "knowing" there was that account made them less desperate when they sought to find new ways to save or to improve their income, and sure enough it came in so the bank account never had to be touched.

[bio mom]

So what is the stockmarket reacting to today? I can't keep up with their bad moods.

[Charlie (Colorado)]

It seems to me that one of the problems is that the system has been awash with credit.

Which isn't the same as liquidity. Consider, for example, someone who buys a 5 year CD for $1000. They have the $1000, but it's not liquid. At the end of the five years, they cash in the CD, get oh, $1280, say. Now it's liquid.

[Charlie (Colorado)]

So what is the stockmarket reacting to today? I can't keep up with their bad moods.

To some extent, any attempt to "explain" what the market is doing is a mistake, because there's no "market" to "do anything." It's the sum of a bunch of decisions by a bunch of individuals.

The favorite theory right now is that people were expecting Bernanke to hint at a rate decrease; instead, he talked about how they could use the interest they now pay on reserve deposits to control the rates. Since lower interest rates make stocks more desirable, people were waiting for the rate decrease to trade. When the hint didn't happen, some of them decided to do something else with the money.

[Pofarmer]

Which isn't the same as liquidity. Consider, for example, someone who buys a 5 year CD for $1000. They have the $1000, but it's not liquid. At the end of the five years, they cash in the CD, get oh, $1280, say. Now it's liquid.

That's true, except you can get the CD out with a penalty.

What I was trying to point out was the difference between credit and liquidity.

Let's look at, say, a 200 person manufacturing plant that borrowed money for an expansion. All of a sudden orders drop off, they can't meet payroll next week, and they can't borrow short term money easily, because the recent expansion put too much debt on their books. Is the problem that credit was too easy previously? Is the problem that they can't borrow short term money because it simply isn't available? Is the problem that the economy is in a correction? Is the problem poor management and lack of profitability? Is the problem a realignment in their market sector?

Just because money becomes available doesn't mean that a company suddenly becomes a great credit risk. If the problem is a general lack of profitability across sectors in the economy right now, then shoveling more easy money at it will only prolong the agony. This looks a lot more like the recession in Japan in the 90's than the Great Depression. So far, we've managed to not have the hyperinflation that caused the Japanese to sign 100 year multigenerational mortgages, but, heh, this things still young.

One things for sure, there should be some good books written on this some day.

[Charlie (Colorado)]

That's true, except you can get the CD out with a penalty.

Okay, I should have said "an old fashioned CD for which there was a penalty for early withdrawal."

What I was trying to point out was the difference between credit and liquidity.

And you do so by confusing them.

Look, let's stick with the simple example: a $1 million 5 year CD, you can't withdraw the money until the 5 years is up or at least you pay a big enough penalty that you don't want to do it at all. That $1 million is your only asset, and you have no debt. (I'm setting it to a million instead of a thousand to make the "only asset" part semiplausible.)

Oh, and this is an artificial example, so we're not worried about the bank holding the CD. Maybe it's a T bill, or a Swiss government bond or something.

The CD is at 5 pct, compounded annually, so at the end of five years you get $1,276,281.56. Roughly.

That means you have $552,563.13 income per year, but since you can't take part of the value out of the CD, it's not cash. You're illiquid.

If that's your only asset and your only source of revenue, you're certainly not insolvent, but you still can't eat.

If, for whatever reason --- like the credit markets freezing --- you can't borrow against your CD, it's not because you're insolvent. But you still starve.

That's California's problem right now: there is little in the world more certain than that California will collect a few billion dollars in sales tax etc in the next several months. People will continue eating, receiving salaries, etc. Its as good as our mythical million-dollar CD. But with the credit markets frozen, they "can't eat."

[DrJ]

Charlie,

Where can I get a CD that pays that sort of rate? (Hint: you slipped a decimal.)

[bio mom]

Thank you Charlie. I will always come to this site to get answers to the financial market questions. You know a lot.

[steve sturm]

Charlie: misplace a comma? And you're partially right in your assessment of the 'market', the market isn't some finite entity, but is the sum of millions of individual actions. But there are some actors (pension funds, hedge funds, mutual fund managers) whose actions influence the market more than others, and it is their decisions to buy/sell that drive the market (at least in the initial stages of a rally or sell off). Whether it becomes a trend depends on the extent to which everybody else who comprises the 'market' (Ma and Pa and their utility stocks, as well as Joe Daytrader who's working the momentum angle) decides to follow their lead. As for today, the explanation is pretty simple: the big players see nothing on the horizon that indicates the masses are going to jump back into the market; on the contrary, they see signs that the mass is going to continue to sell off holdings to accumulate cash. Thus the big players decided to sell now in order to beat the even lower prices in the days ahead.

[Charlie (Colorado)]

Where can I get a CD that pays that sort of rate? (Hint: you slipped a decimal.)

Crap.

Okay, sorry, $55,256.31.

Now you know why I'm a logican and not an accountant.

Thank you Charlie. I will always come to this site to get answers to the financial market questions. You know a lot.

Well, thank you, but honestly it's not that I know so much; this is simple stuff really, most of it stuff I learned in the family's retail business instead of a finance class or something. The whole thing with liquidity versus solvency was something that we worried about more or less every day in the grocery store.

[Pofarmer]

C'mon Charlie.

Let's look at somebody trying to get credit to buy a new car or truck.

They have a house they took a 5% down 30 year note on 5 years ago, that has now dropped 25% in value in a lot of places. They have a two or three year old vehicle they are several thousand $ upside down on. They have 10k in credit card debt, which, I beleive, is close to the avg. The fact that that individual can't get a car loan says nothing about the amount of liquidity in the market. You are confusing the players here. Supposedly, the bailout injected "liquidity" into the lenders. That does nothing to help the borrowers.

Frankly. California should have planned better. My sympathy is small, real small. People need to learn to make good decisions, reality is a real bitch. We spend all this time and effort and MONEY just to insulate people from the effects of their bad decisions and then wonder why the continue making them over, and over, and over. Enough already.

That's California's problem right now: there is little in the world more certain than that California will collect a few billion dollars in sales tax etc in the next several months

How much of that is already spoken for? California is in the state they are in because the aren't managing their money wisely. Why would I make them a loan. Can't California sell bonds???? Folks should just jump on those, right? I mean it's a sure thing. Would you want to buy $5000 or $10,000 worth of California debt?

Its as good as our mythical million-dollar CD. But with the credit markets frozen, they "can't eat."

You've got a million dollar CD and you didn't plan on meeting expenses???

Once again, you illustrate the problem perfectly.

[Pofarmer]

Charlie.

What you seem to be arguing is that everythings fine and we just need to get the big boys lending money again.

Is that right?

[steve sturm]

Maybe we can agree that what we're facing is a combination of a lack of liquidity, a lack of solvency and a lack of confidence? Those with money are sitting tight and aren't willing to let go of it right now, either to spend, invest or loan (they're buying T bills and getting next to nothing). And those who are more optimistic, because they're either insolvent or have no liquidity, don't have any money and can't borrow any money to spend. There just ain't enough optimistic folks with money to turn things around.

Thus, improving one side really doesn't cure the problem. Improving liquidity doesn't do any good if confidence doesn't improve. Improving confidence doesn't help if there's no money to lend. And nothing matters if everybody starts losing money.

[Charlie (Colorado)]

Let's look at somebody trying to get credit to buy a new car or truck.

No, let's not. Let's stick with the simple example.

I constructed an artificial example to make the point of the difference between solvency and liquidity.

Yes, you wouldn't normally do it that way in reality, any more than you can really get a perfect gas or a frictionless surface, but it's a lot easier to talk about them in physics class.

Frankly. California should have planned better. My sympathy is small, real small.

I don't care. Learn to live in the real world or don't. I'm tired of trying to explain things when you obviously don't care to learn.

What you seem to be arguing is that everythings fine and we just need to get the big boys lending money again.

Is that right?

Nope. Demonstrate some interest in understanding what I'm saying and I'll explain more.

[Pofarmer]

Maybe we can agree that what we're facing is a combination of a lack of liquidity, a lack of solvency and a lack of confidence?

Yes.

Thus, improving one side really doesn't cure the problem. Improving liquidity doesn't do any good if confidence doesn't improve. Improving confidence doesn't help if there's no money to lend. And nothing matters if everybody starts losing money.

Yes

[Charlie (Colorado)]

Maybe we can agree that what we're facing is a combination of a lack of liquidity, a lack of solvency and a lack of confidence?

Well, kinda.

California's problem is not a lack of solvency: it has a pretty much guaranteed income stream and an immense net worth.

Lack of confidence is probably closer to the core issue; California can't buy commercial paper if people don't want to rent money. But there is so much cash around now (money supply is just rocketing upward) that can't last.

Lack of liquidity is an effect, not a cause. We're short on liquidity because people who have cash don't want to rent it.

[Pofarmer]

I constructed an artificial example to make the point of the difference between solvency and liquidity.

But, Charlie.

That doesn't address the PROBLEM.

[Pofarmer]

California's problem is not a lack of solvency: it has a pretty much guaranteed income stream and an immense net worth.

So then why do they need to borrow money?

Here's a hint.

The income stream is spoken for.

[Pofarmer]

Hmmmm, maybe they need to sell a state park or two or something.

[Pofarmer]

Lack of liquidity is an effect, not a cause. We're short on liquidity because people who have cash don't want to rent it.

Then that's not really a lack of liquidity then is it? That's people doing what they want to do with their own money.

Which brings me back to the point about Fed deposits going waaaayyyyyyy up between Sep10-24th.

[steve sturm]

Lack of liquidity is an effect, not a cause. We're short on liquidity because people who have cash don't want to rent it.

I'd have thought we're short on liquidity was more because, to refer to your example, those with assets can't borrow against those assets. If I can't convert assets into cash, I can't loan, I can't spend, I can't keep making payroll.

The income stream is spoken for.

Actually, their income stream is more than spoken for, they don't have the cash coming in to honor all of their existing commitments, and that is a good part of why investors are refusing to lend them any more. And while California has a lot of 'assets' that theoretically could be sold, even discounting the legal challenges California would face if they tried to sell a bridge or a park, how silly would you have to be to buy something from California, knowing that you had to deal with the regulations and restrictions they'd place on your economic use of that property? Default, anyone?

[Charlie (Colorado)]

That doesn't address the PROBLEM.

Po, I don't care what you think the problem is. I'm talking about the credit freeze.

[Charlie (Colorado)]

So then why do they need to borrow money?

See the explanation above.

[Charlie (Colorado)]

Then that's not really a lack of liquidity then is it? That's people doing what they want to do with their own money.

Look, what color is the sky is on your planet? Here on earth, when people have illiquid assets and not enough cash, that's called "a lack of liquidity."

[Pofarmer]

Po, I don't care what you think the problem is. I'm talking about the credit freeze.

Then why aren't you inquisitive about why Fed deposits went up by several 10's of billions of $ between Sep 10th and the 24th?

[Charlie (Colorado)]

Default, anyone?

Steve, the restriction on shorts ends tomorrow. If you really think California is going to default on short term debt, I'm sure there are ways to put money behind it.

You go ahead. I'll watch.

[bgates]

I don't care what you think the problem is.
Pofarmer, why bother talking to somebody who talks to you like that? Charlie's the reason I went looking for the troll blocker script in the first place.

[Charlie (Colorado)]

Then why aren't you inquisitive about why Fed deposits went up by several 10's of billions of $ between Sep 10th and the 24th?

Who says I'm not, well, interested at least? I'm not particularly "inquisitive" because I've got what I think is a pretty good idea of why. I'm just tired of going through the "Hey, look over there!" game.

You're falling into the same fallacious idea that money is kept in a big room in the basement of the bank.

Pretty much, there are three things a bank (or other financial institution) can do with money: buy something, loan it to someone, or put it in their reserves at the Fed.

We know that right now they don't want to loan it out, at least at the overnight rates. You can still get money for longer terms and you can still get mortgages with good credit and a downpayment (in fact, mortgages rates are down.)

They can buy something else, and the safest thing is to buy T bills. There's been enough demand for T bills that they're expensive; that makes the yield low, and means there's downside risk, ie, the price could drop.

Or you can put it into reserves, where it's guaranteed not to lose value. (Actually, now, it makes a half percent or something.)

But they don't have any really big mattresses, so that's pretty well it.

If banks etc don't want to rent their money out as commercial paper, where do you think they'll put it?

[Pofarmer]

Uhmmmm, Charlie, here's YOUR statement that I was responding too.

We're short on liquidity because people who have cash don't want to rent it.

And my reply was

Then that's not really a lack of liquidity then is it? That's people doing what they want to do with their own money.

You're doing a whole bunch of mental circling here to support your predispostions regarding the bailout.

Now, if you had said this when people have illiquid assets and not enough cash, that's called "a lack of liquidity."
Then you would have been correct.

Look at it this way. You said the markets aren't rational, but they are. Let's say I'm one of these big ole investment banks. I know the Shit is Gonna Hit The Fan in Europe on Monday. I don't have a clue how much exposure the other players have to this. I know the stock market is gonna take a hit, and I have signifgant assets tied up in stocks. So, what is my first inclination????? Well, probably to hoard cash, just in case. Well, it's right there in the Fed Report. It's the bankers version of insider trading. Paulson saw that and panicked. Now, you can blame it on MBS or CDS or whatever, but as Rick Ballard has already pointed out, the performance in that sector really didn't warrant the extreme response. And now, Lehman is claiming that J.P. Morgan withheld 12 billion $ in cash that it could have used during it's own actual, liquidity crises, brought on by falling markets. this isn't as simple as "Oh my god, there's not enough money."

[Pofarmer]

OH, and California will be having a bond Auction starting Oct 13th. There's your chance to step up to the plate.

[Charlie (Colorado)]

Charlie's the reason I went looking for the troll blocker script in the first place.

Well, I guess it works less well than you hoped.

[Pofarmer]

Pofarmer, why bother talking to somebody who talks to you like that?M

Masochist????

I don't know.

[steve sturm]

Charlie: if I'm not mistaken, the ban on shorts only applied to equity plays and not debt instruments. And while I have no doubt there's a way to bet on a decline in the value of California bonds, I have no idea how to go about it.

[Pofarmer]

If banks etc don't want to rent their money out as commercial paper, where do you think they'll put it?

I think they'll put it exactly where they did.

So where was the "crisis" in banks making alternative investments they deemed safer than short term loans in a hostile environment?

[steve sturm]

...you can still get mortgages with good credit and a downpayment (in fact, mortgages rates are down.)

That reminds me of the joke where a lady complains to her butcher that the deli across the street is selling meat for less. Asked why she doesn't go across the street, she replies the other deli is out, to which the butcher replies "Lady, I'd charge less if I didn't have any". (yeah, I know it loses something in my telling...)

Yeah, mortgage rates are down, but only for those few who are lucky enough to get approved.

[steve sturm]

So where was the "crisis" in banks making alternative investments they deemed safer than short term loans in a hostile environment?

The crisis? The companies that rely on commercial paper to fund their operations having to scale down or shut down because they've lost access to relatively cheap capital... and the ripple effects that has on the economy as a whole. Money 'sitting' in a Fed account doesn't do the economy any good (or, at a minimum, not as much as money circulating in the commercial paper market).

[Charlie (Colorado)]

You're doing a whole bunch of mental circling here to support your predispostions regarding the bailout.

No, I'm just using the words in a standard way.

Now, if you had said this: "when people have illiquid assets and not enough cash, that's called 'a lack of liquidity.'" Then you would have been correct. [Re-punctuated for clarity.]

Well, kinda sorta, but you're missing the "because" part. Yes, if you are short of cash, you lack liquidity. Either you have assets or you don't; we're talking about the case where you do have OTHER assets.

If you have other assets, and you need more cash, you can either sell assets, or you can borrow against them. California, being a state, has as its major easily convertible asset its revenue stream from taxes. It can't really sell that asset --- it can't delegate the ability to collect taxes to someone else --- so it has to borrow against it.

Because California gets its tax receipts irregularly, it, like pretty much every other state, borrows against them. California's credit rating, according to S&P, is "A-1", which is not as good as it could be, but still, quote, "indicates that the degree of safety regarding timely payment is strong." But nobody is renting their money --- which is just another way of saying no one is loaning the money. (Think about it.) Not even to AAA rated places. So California is having a liquidity problem because no one is renting out money.

Now maybe you think California shouldn't do it that way, but you might as well say California should pay all it's bills with truckloads of currency. Nobody does it that way because it's inefficient and expensive.

You said the markets aren't rational, but they are.

Never. I've been exerting myself trying to explain why what was happening was rational, and could be explained without needing conspiracy theories.

Let's say I'm one of these big ole investment banks. I know the Shit is Gonna Hit The Fan in Europe on Monday. I don't have a clue how much exposure the other players have to this. I know the stock market is gonna take a hit, and I have signifgant assets tied up in stocks. So, what is my first inclination????? Well, probably to hoard cash, just in case.

Yeah, okay, that's pretty much what i've just gone through.

Well, it's right there in the Fed Report. It's the bankers version of insider trading.

What? You might want to expand that.

Paulson saw that and panicked.

No, he saw the TED spread go up and the amount of commercial paper being transacted go down. It's not like that was a secret.

But let's say that it happened your way: then what would happen is that companies would stop selling commercial paper, leading to the exact same effect.

Now, you can blame it on MBS or CDS or whatever, but as Rick Ballard has already pointed out, the performance in that sector really didn't warrant the extreme response.

Uh, I'd be real surprised if Rick agrees with you. Remember that whole business about "mark to market"?

And now, Lehman is claiming that J.P. Morgan withheld 12 billion $ in cash that it could have used during it's own actual, liquidity crises, brought on by falling markets. this isn't as simple as "Oh my god, there's not enough money."

Okay, good, you've mostly caught up. I would kind of like you to point out where you thought I said it was simply "there's not enough money."

[Charlie (Colorado)]

So where was the "crisis" in banks making alternative investments they deemed safer than short term loans in a hostile environment?

Yeah, that was pretty much it. Now, we've got really good reasons to think that they have over-reacted, which markets composed of real people really do sometimes do. One of those reasons is "mark to market". Another reason is loss of confidence, which is to say panic.

Now, we can let that panic turn into a major depression, and maybe that suits your puritan impulses, but the costs are awfully high. And maybe in some abstract sense it would be better if a lot of the wealth of the world wasn't leveraged, but then you're saying that people ought not to be allowed to do what they want with their money. In any case, we don't live in that world --- which is sometime in the 1820's --- but I like it now.

Or, we can let the Treasury and Fed do what the Fed is chartered to do: keep the markets working and the financial system in operation.

[hrtshpdbox]

"Deleveraging" is happening all over the world right now; that's the primary reason why the Dow is down this week (hedge funds, burned overseas, having to meet margin calls with proceeds from U.S. equity sales). There's no reason at all to think that the bailout won't achieve it's objective of providing liquidity by taking on currently undervalued assets, thus providing a floor and some confidence for mortgage assets. By the way, a 5-year CD would pay interest semi-annually and return it's principal (&1,000.) and the final interest payment at maturity; maybe that's what was meant, but it was worded oddly. Anyone gonna talk about the debate??

[Pofarmer]

Or, we can let the Treasury and Fed do what the Fed is chartered to do: keep the markets working and the financial system in operation.

Problem is that doesn't include making sure the markets go up in a never ending nice progressive spiral. Doesn't happen that way. Markets Cycle. Economies Cycle. Businesses Cycle. For some reason we seem to think we can beat that now. Ask the Soviets how that works. The longer we draw this out, the worse it's gonna be in the end. Maybe they can engineer a soft landing, but it's gonna be unimaginably expensive. Let your grandkids pay for your comfort today type of thing.

[Pofarmer]

Anyone gonna talk about the debate??

Honestly not all that interested. Gotta go load a couple loads of corn.

[matt]

The problem is that there is a general liquidity crisis. Opting to buy up mortgage backed securities from the banks is one part, but banks have stopped lending to corporations. Over the past 2 decades, leverage was the name of the game. So basically I have $100,000, say. With that $100K and a loan from my bank based on the profitability of the company I want to buy, the bank will loan me another $1,000,000 based upon the fact that I can pay back their loan and interest. That's why you hear leverage ratios of 5:1, 8:1 or 20:1 in a few rare cases, mainly in Europe.

This is, to Wall Street, all well and good, because what usually happens are those magical "synergies"; factory closings, outsourcing, layoffs and other "efficiencies". All of this helps improve short term profitability and helps the company make more short term profits which they can then leverage further.

All of this is predicated on business continuing to grow or at least remain stable. The house of cards starts to fall apart when things slow down.

Commercial Paper and bonds are another way for companies to finance this growth. because the banks don't have money to buy these instruments, the corporate sector gets hit as well. That's why the Fed is stepping in on this now.

The financial system, when you look at it, is a rats nest. All sorts of funky instruments that were allowed to flourish and in many cases did well, up until the whole game of musical chairs came to an end. Index futures, mortgage paper, a lot of this stuff is basically Las Vegas grade. And very few people actually understand it.

LTC almost trashed the financial system several years ago because they had a couple of Nobel winners and a bunch of supposedly sharp financial technicians who had it all figured out, except they didn't. markets do that to the best when they're a free for all.

Having said all of that, I've got some great land deals in Florida, and you can all be the first on your block......

[hrtshpdbox]

"Honestly not all that interested."

Well, if McCain does well, maybe he can save the country from being subjected to a socialist for four years. Other than that, I guess, it's not very important.

[Pofarmer]

Honestly not all that interested."

OH, C'mon. I'm definately intersted in the outcome. I'm just kind of burned out on the process right now.

[TCOisbanned]

I didn't watch the debate. Am not energized by McCain post bailout. I was during the Palin rally. I suspect that the bump he got from Palin and the drop he is having now, has a lot to do with folks like me, who are dissatisfied with liberal Republicanism and cronyism and going along with Bush policies since he's our party leader, even when the policies are wrong.

Palin and drill-drill, thrills
McCain and bail-bail, fails