No one seemed to questioning the vicious buying of Bank of America (BAC) and Citi Group (C) on a Wednesday where stress test leaks suggested the two banks will need an additional $35 billion and $50 billion of common equity. Does the transparency of major U.S. banks' financial needs warrant the KBW Banking Index's gain of 10%+ on Wednesday?
How about the Temporary Government Liquidity Program (TGLP)? This part of the banking system assistance hasn't received much of the limelight, given the market focus on stress test results. However the TGLP has been crucial to the supposed strength among financials as the program allowed banks issue FDIC guaranteed debt. Through the offering Goldman Sachs (
GS), JP Morgan (
JPM), Morgan Stanley(
MS) and others to borrow capital for less than half the interest they would have to pay standing on their own two feet.
The assistance to the financial system as a whole through government backed offerings of loans to students, car buyers, home owners and firms cannot be free. Similarly, the government has planned to finance the injections of equity into banks and "main street" stimulus plans by issuing its own debt. Who's buying that debt? The usual players come in the form of other countries looking for a "sure thing", yet this time the strongest financiers such as China would rather invest their cash in domestic stimulus efforts. It turns out "we the people" are buying the debt as the U.S. Federal Reserve has begun acting on their promise of buying U.S. Treasuries to the tune of $300 billion.
Strolling down memory lane will toss us back into October of 2008 when U.S. equity players were said to have forced action by the treasury to bail out the nations largest banks with the most MBS exposure. The story isn't much different today, just much more quiet, as capital market rates have been provoking the Fed to buy Treasury debt in order to keep the rates of debt in line with levels comfortable for the Fed. At the end of the day capital markets influence the cost of money throughout the entire economy.
On March 18 the Federal Reserve FOMC announced that they would add "up to $300 billion dollars of longer-term Treasury securities" to it's balance sheet, putting the U.S. on the hook to repay debt up to 30 years out. The announcement was said to be necessary in order to finance a potential $1 trillion of TALF loans added to the boisterous spending committed to already. The announcement sparked strong initial buying of long-term treasuries such as the 10-yr note graphed below (note the March 18 0.5% drop).
Being that the Fed is out of bullets on the Discount Rate and Federal Funds Rate fronts, Bernanke now hopes to keep capital borrowing rates low by inflating it's own balance sheet with Treasury debt. While much is hazy one thing is certain, the U.S. economy will be allowed cheap financing only if the Fed has enough political leeway and intestinal fortitude to buy U.S. Treasury debt for years to come. With a Fed void of an exit strategy, the U.S. economy remains uncertain at best.
