Monday, March 17, 2008

Global selloff overnight/US holds it ground

Happy Monday everyone. Well after Bear Stearns was sold at $2/share I figured all of the world markets would react to the news in a negative way. So I watched Asia open down 4% within a few hours of trading. As other world markets opened the reaction was the same. Gold was up $34!! Yen/carry was touching 96. It seemed all hell was breaking loose.

Before I knew it we had a global selloff on our hands and when I turned on CNBC at about midnight they had special coverage of the global selloff and were showing CNBC's International show live.

I then started thinking wow US crash on Monday? Futures were way down. So I watched the opening of the exchange today expecting fireworks. I figured maybe a Lehman or a hedgie might go under. So what happened? Nothing! I then tried to figure out why.

It didn't take me too long to figure out why. I read a little more into the Fed's actions today in a Bloomberg article. A little excerpt:

"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 &
. to help it finance the purchase of Bear Stearns Cos. after a run on Wall
Street's fifth-largest securities firm.
``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.''

Opening up lending to firms other than commercial banks represents a shift
in the Fed's 94-year history.
The so-called primary dealers include firms that
are units of commercial banks and several that aren't, including Goldman Sachs
Group Inc., Morgan Stanley and Merrill Lynch & Co."

Why did this help prop up the US markets today?

Because the Fed is now allowing the investment banks like Lehman and Goldman Sachs borrow from the discount window. This is pretty much unprecedented as you can see above. IMO this will probably save Lehman at least for now. As a result the markets opened very tame. Thats not to say things can't unwind later.

This is just another band-aid that is allowing the banks to hide their mistakes. The Fed should be forcing the investment banks to come clean. Instead, they are now allowing them to borrow from the discount window. The only reasoning for this is many of the IB's are probably in deep trouble and some might have collapsed today without this borrowing alternative.

Its a very desperate move and does not bode well for the future. Japan's 10 year deflation nightmare happened mainly because of one reason. The governement allowed the banks to hide their losses for years and years thus there was no trust and their market went from 38,000 down to 14000 in the process. It now sits at 11700 because of our recession risk. Lets HOPE we do not make the same mistake.

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