Monday, January 21, 2008

Congratulate the Giants and bash the Fed

The played better than the Pack, but Green Bay squandered opportunity after opportunity, to pull off a victory. The football gods were giving the Packers the chance to pull the game out in the cold, but even it was too cold for the ghosts of Lombardi.

Now can you imagine me saying that the Pack played better than the Giants? Then how can Congress glad hand Bernanke's completely clueless performance at the Fed? Could they have gotten away with that in sports?

The Fed could of cut rates deeper which would of caused the other central bankers around the world to cut. But they didn't. Then, we just had housing in a depression, and autos in a recession. Deep interest rate cuts could have prevented the pain from spreading. Interest rates were the only anecdote the Fed had to stop the death spiral in home prices. But the Fed took it's time. Now, the contagion of lower home prices has spread throughout the economy, and is being felt worldwide. So now we are in the recession, that the Fed still doesn't see existing!

Now we have this mess, and it is getting downright ugly! The downgrading of the monolines will cause hundreds of billions of dollars of securities to be sold by those who only can own AAA paper. And it will force the recognizing of billions of more losses on banks already tattered balance sheets.

The Fed originally thought the only problem was "contained" sub prime and that it wasn't "contagious." We know how ridiculous that was. But now it's making the same mistake again. By looking at the LIBOR rate which has fallen due to the Fed's TAF plan, the Fed thought problems were being resolved. Instead the contagion has spread to any securitized asset backed and now to commercial real estate.

A perfect example is Northern Rock Plc. The central banks thought they had figured out to stop the run on this, but it couldn't line up buyers until the UK said it would guarantee the bonds backed by the home loans.

Solve one, and then go to the next, as now we have a run on Scottish Equitable's property fund. Remember the first rule in a panic. Panic first!

If our Fed can learn anything from this, it is that if you want buyers, you need to guarantee the bonds. So cut rates now, gaurantee the monolines, and let Buffett take the residual business over with an earn-out. It will stem the panic, and give the market breathing room. Unfortunately, our academic Fed will think they are following Cramer's script, so they'll want to try something else.

But this market won't allow another plan to work.


Anonymous said...

If the US Govt guarentees the bonds, then the ten year treasury rate would have to be much higher to justify the default risk. Like, say 20%. How would that help?

Palmoni said...

1/2 of municipals have a AAA rating w/o insurance, so the municpals w/o insurance would have to pay a bit more in yield..the problem is with the AAA CDO's and asset backed..on these, there will have to be some it would have to be at a certain percentage.

What the terms of the bailout would be is where the rub is. Wall Street sees deep losses, while those holding the paper just assumed it would eventually be paid.

Now that the insurance is worthless, they'll have to come to some common ground where the private sector can make money off of the public sector guarantees.

Probably be modeled after terrorism insurance after 9/11.

But the fed gives us our substantive cut first.

At least we'll know what substantive is.

A shame we need a market meltdown to get terms defined.