“The focus of the current panic is that banks are unwilling to lend to one another because they don’t trust their counterparties or because they need the cash themselves. If government agencies take shares in their respective banking sectors, thus adding capital, the question will remain outstanding as to whether it is enough. If however, governments guarantee loans made between banks, it will almost certainly get the market moving once more. This approach runs the risk that suspect institutions will survive when they would normally have gone bust. However, given the extreme nature of this crisis, this question of moral hazard is going to be put off for another time.

“The best indicators of liquidity remain the TED spread and the OIS spread. Both made new highs today and remain in accelerating uptrends. The VIX also hit another new high today and further indicates that fear is the overriding emotion gripping investors right now. Stock markets are unlikely to find an important low until these spreads begin to contract.”

Source: Eoin Treacy, Fullermoney, October 10, 2008.

Financial Times: UK Treasury unveils bank rescue
“Britain’s largest banks are to be part-nationalised after the government took the momentous decision to pump tens of billions of pounds of public money into the sector to avert a banking collapse.

“The government is to put up to £250 billion into the banking system in an effort to keep banks lending. It will also offer a guarantee to banks issuing medium term debt, which could mean backing a further £250 billion of bank borrowings. But it is likely to demand dividend cuts and the end of big bonuses at the banks in return.

“Under the plan, announced by the Treasury on Wednesday, seven leading banks and the Nationwide Building Society will initially apply for £25 billion in permanent capital to raise their Tier One capital ratios, with a further £25 billion available as a stand-by and for other eligible institutions. The banks have agreed to conclude their recapitalisation by the end of the year.

“The banks involved are Abbey, now part of Santander of Spain, Barclays, HBOS, HSBC, Lloyds TSB, Royal Bank of Scotland and Standard Chartered as well as Nationwide. Other UK banks and building societies are invited to apply for the scheme as well.

“Referring to ‘extraordinary market conditions’, the Treasury said it would provide at least £200 billion under its £200 billion special liquidity scheme ‘until markets stabilise’.

“The government will also, for a fee, guarantee new short and medium term debt issues by the banks to help them refinance wholesale funding obligations as they fall due. It said it expected the take up of this guarantee to be of the order of £250 billion.”

Source: Financial Times, October 7, 2008.

Financial Times: Germany guarantees savings to avert panic
“Germany said on Sunday it would guarantee all private German bank accounts – currently worth €568 billion – in a dramatic move to prevent panic withdrawals as fears over he worldwide financial crisis spread to Europe’s largest economy.

“‘We want to tell people that their savings are safe,’ Angela Merkel, chancellor, said at an unscheduled press conference on Sunday. The scheme would cover existing accounts and others which savers might open.

“German government officials also late on Sunday said the country’s commercial banks had agreed to inject an extra €15 billion of liquidity into Hypo Real Estate, the ailing German mortgage and public sector lender, raising the bail-out agreed last week to €50 billion, the largest since the outbreak of the financial crisis. The original rescue attempt had threatened to collapse after it emerged at the weekend that the full extent of Hypo’s funding gap had not been disclosed.”

Source: Bertrand Benoit and James Wilson, Financial Times, October 6, 2008.

John Authers (Financial Times): Fed to start buying commercial paper

Click here for the full article.

Source: John Authers, Financial Times, October 7, 2008.

CBS News: Wall Street’s shadow market
Steve Kroft looks at some of the arcane Wall Street financial instruments that have magnified the economic crisis.

Click here for the full article.

Source: CBS News, October 5, 2008

Bloomberg: Lehman bondholders get little insight on price from CDS auction
“Lehman Brothers bondholders didn’t get a clear indication of how much they will recover in the firm’s bankruptcy from an auction of insurance on its debt, two analysts said.

“Yesterday’s auction determined that investors who bet on a default of Lehman’s debt by buying derivatives called credit default swaps should get 91.375 cents on their dollar. The price was set by auction administrators Creditex Group Inc. and Markit Group Ltd., with 14 financial institutions bidding. That figure was calculated based on an ‘inside market midpoint’ price of 8.625 cents on the dollar for Lehman’s debt.

“The auction has little to do with what bondholders will recover once Lehman’s bankruptcy, filed September 15, has been fought out in court by creditors, said Matt Dundon, managing director of distressed analysis at Miller Tabak Roberts Securities.

“‘I take very little directionality on the ultimate value of the bonds from the CDS auction,’ Dundon said.

“Kevin Starke, an analyst with CRT Capital Group LLC said there are too many unknowns so far in the Lehman case to accurately predict recoveries.”

Source: Tiffany Kary, Bloomberg, October 11, 2008.

Reuters: NY Fed calls Friday meeting for CDS players
“The Federal Reserve Bank of New York said on Wednesday it has summoned participants in the $55 trillion credit derivatives market to a meeting on Friday, which sources say will focus on determining which clearing house the market will support.

“Calls for regulation and centralized clearing of credit default swap trades have gathered steam in the wake of Lehman Brothers’ failure last month.

“Critics charge that credit default swaps are central to the spreading fears in the markets and pose systemic risks, as the market’s private nature makes it impossible to know the size of a counterparty’s exposures and where they are distributed.”

Source: Reuters, October 8, 2008.

BCA Research: Policy response – timeliness is key
“In a recent Special Report, we highlight that it took a massive policy response in prior real estate/financial sector crises (e.g. Norway, Sweden, Finland, Japan and the US) before markets stabilized. In fact, in each episode conditions did not stabilize until the vast majority of struggling institutions were supported or dissolved. In three instances the government needed to extend a blanket guarantee for the entire banking system. Moreover, the longer policymakers delayed a sizable bailout package, the greater were the economic and banking sector losses.

“Bottom line: History suggests that a rapid and sizable policy response (that deals with the majority of problem loans) is needed when faced with a banking crisis. Hesitation allows a negative economic feedback loop to develop, ultimately leading to greater cleanup costs. This is already evident in the US and Europe, where recessionary pressures are intensifying.”

Source: BCA Research, October 6, 2008.

Bloomberg: Treasury to hire asset management firms to jumpstart rescue
“Treasury Secretary Henry Paulson is hiring as many as 10 asset-management companies to join the lawyers and bankers he is recruiting to kickstart the government’s new $700 billion bank-rescue program.

“The Treasury began implementing the plan within an hour of Congress yesterday giving Paulson the powers he sought to combat the US financial crisis. Paulson is seeking to assemble a team to determine which toxic securities to target, how to value them and how to buy them. BlackRock, Pimco and Legg Mason are seeking to become money managers for the program, people familiar with the matter said.

“‘This is something that, for a typical company, would take no less than five years,’ said Lynn Turner, a former chief accountant at the Securities and Exchange Commission. ‘Anyone who thinks they can do this in two weeks is insane.’

“Ed Forst, the former Goldman Sachs executive Paulson hired to head the transition team, started work last week and is charged with helping establish the new Office of Financial Stability.”

Source: Rebecca Christie and Robert Schmidt, Bloomberg, October 4, 2008.

Financial Times: IMF sees greatest shock since 1930s
“The financial crisis will drive down global economic growth to its lowest since 2002 with a big risk it will drop even further, the International Monetary Fund has warned.

“Though Olivier Blanchard, the fund’s chief economist, said that the chance of another Great Depression was ‘nearly nil’, the IMF said that the US and European economies were mainly already in or close to recession.

“‘The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,’ the IMF said. ‘The situation is exceptionally uncertain and subject to considerable downside risks.’

“The fund said that global growth was likely to slow to 3.9% in 2008 and 3% in 2009, sharply down from 5% last year. Some economists regard 3% or 2.5% global growth as equivalent to a world recession, given the trend rates of growth in the global economy, but Mr Blanchard said that such definitions were unhelpful.

“The IMF chief economist’s optimism that the world would avoid a repeat of the Great Depression of the 1930s was based on an expectation that governments would follow the right policies. European governments were having difficulty in coordinating their response to the crisis and more action was needed to shore up their shaky financial systems, he said.”

Source: Alan Beattie, Financial Times, October 8, 2008.

CNBC: Lazear on the global economy
“Discussing the market slide and the $700 billion bailout package with Edward Lazear, Chairman of the Council of Economic Advisers.”

Source: CNBC, October 7, 2008.

Barry Ritholtz (The Big Picture): Fix the credit problem, not its symptoms
“Why are markets reacting so negatively to a near $1 trillion bailout? The short answer is that the Federal Reserve and the Treasury Department have been focusing on the wrong issues. They have been treating falling asset prices – a houses, stocks, bonds – as well as the lack of confidence between banks, as the actual issue. This is the wrong approach. Falling asset prices and a lack of confidence are a result of the underlying problem. You don’t cure alcoholism by getting rid of a hangover; you cannot resolve confidence issues by merely cutting rates.

“The primary problem is that banks are refusing to extend credit to each other. Why? Because they do not understand the liabilities of their counterparties. Translated into English, that means they don’t know if the other bank whom they are dealing with will still to be standing tomorrow.

“The thing roiling markets today is not the lack of confidence; It is capital, or more accurately, the lack thereof. Thanks to a series of very poor trades – excessively leveraged and absurdly risky to boot – banks are now dramatically undercapitalized.

“As we have seen in just about every historical financial crisis, the shortage of capital is the underlying cause of monetary mayhem. Too much debt, too little equity, makes any financial system cease to function.

“So what would solve it? The first step to accomplish this is triage. Identify the banks that cannot survive, and like Old Yeller, ‘gently’ put them down. Euthanize the bad ones so the good ones can survive. Nationalize ’em, sell their accounts to strong banks, and prevent further liabilities to the FDIC (which insures all accounts up to $250,000).

“Next, recapitalize the banks that can survive by buying preferred stock. That is what Warren Buffett did with General Electric and Goldman Sachs when he made his investments. The Treasury should announce a matching program, where any private investment into a Bank is matched by the government, dollar for dollar, and on the same terms. This fixes not merely a balance sheet issue (like TARP does) but the actual capital structure at the root of the current crisis. And it does so on terms that are good for the taxpayers too.

“As this process eliminates the bad banks and recapitalizes the good banks, normal lending will resume. Defaults and insolvency will no longer paralyze the financial industry. This is how Sweden resolved its financial crisis in the nineties, and how England just started to address their problem this past week.

“The good news is that the US is that there are signs the US is starting to move towards the Swedish / British / Buffett model. The bad news is that it has taken this long to even begin contemplating this.

“When banks know their counterparties are not in danger of going belly up tomorrow, they will begin lending again. Confidence will return once the underlying problem is resolved, and not a minute before.”

Source: Barry Ritholtz, The Big Picture, October 10, 2008.

Richard Russell (Dow Theory Letters): Fiat empire – Why the Fed violates the US Constitution

Source: Richard Russell, Dow Theory Letters, October 6, 2008.

Casey’s Charts: Market mayhem has the Fed off balance
“The Fed has resorted to new extremes in this financial crisis by selling off and lending its good assets, US Treasuries, in exchange for toxic waste. The result: the Federal Reserve’s balance sheet has been completely restructured – including innovative off-balance-sheet hocus-pocus – and looks like it’s headed for exhaustion.

“As the government’s primary tool for stabilizing the US banking system, the Fed is now in dire need of a new source of lending to bail out other troubled banks.”

Source: Casey’s Charts, October 8, 2008.

Bespoke: $700 billion and what it can buy
“Since the financial rescue package was signed into law last week, financial markets across the world have taken the pace of their declines to a higher gear. This has prompted people to ask what the Treasury is waiting for. Yesterday afternoon in a press conference, Secretary Paulson said that it ‘will be several weeks before our first purchase’.

“As shown in the chart below, when the TARP plan was first announced in September, that $700 billion was equal to less than 40% of the S&P 500 Financial sector’s market cap. Today, that $700 billion represents over 55% of the sector’s market cap. At this rate, by the time the Treasury opens up its wallet and starts spending that $700 billion, they might be able to buy the entire sector!”

Source: Bespoke, October 9, 2008.

Bill King (The King Report): Adjusted monetary base and reserves soaring
“The Adjusted Monetary Base has soared from $873 billion on September 10 to $1.017 trillion as of Wednesday. The compound annual rate of growth since August 13 is 114.2%. It’s not Weimar, but it is Argentinean.

“Adjusted Reserves are up 768.1% compounded annually since July 30. This is beyond Argentina.”

Source: Bill King, The King Report, October 10, 2008.

BBC News: US debt clock runs out of digits
“The US government’s debts have ballooned so badly the National Debt Clock in New York has run out of digits to record the spiralling figure. The digital counter marks the national debt level, but when that passed the $10 trillion point last month, the sign could not display the full amount.

“The clock’s owners say two more zeros will be added, allowing the clock to record a quadrillion dollars of debt. Douglas Durst, son of the late Seymour Durst – the clock’s inventor – hopes to replace the Manhattan clock with its lengthier replacement early next year. For the time being, the Times Square counter’s electronic dollar sign has been replaced with the extra digit required.”

Source: BBC News, October 9, 2008.

CNBC: Bernanke on the US economy

Click here for part 2 of the video.

Source: CNBC, October 7, 2008.

Asha Bangalore (Northern Trust): Sluggish labor markets – part of scenery
“Initial jobless claims fell 20,000 to 478,000 during the week ended October 4, 2008. Jobless claims filed following hurricanes Gustav and Ike led to a part of the advancing trend of claims seen in the past few weeks. The decline in the latest week reflects fewer initial claims in the hurricane stricken regions. Nevertheless, the elevated levels of both initial and continuing claims are consistent with levels seen in recessions.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, October 9, 2008.

Zillow Survey: US homebuyers worried about interest rates
“I was a little surprised to hear it, but US adults who are in the market for a new home, or who plan to be in the market soon, are most concerned about interest rates.

“Interest rates were most often cited as a financial worry by US adults who plan to buy a home within the next two years, according to a Zillow survey, which was fielded by Harris Interactive. 68% of adults who plan to buy a home in the next two years said interest rates were a concern, while 63% said local property taxes were a worry, and 57% cited purchase price (respondents could choose more than one answer).

“Of those planning to buy a home within the next two years, 94% said they had at least one financial worry about buying a home. For people who plan to buy in three years or more, those worries changed a bit.”

Source: Katie Curnutte, Zillow, October 7, 2008.

Bespoke: We can’t get no … satisfaction
“A Gallup poll released today showed that just 9% of Americans are satisfied with the way things are going in the United States. As shown in the chart below (from gallup.com), this is the lowest reading in history. Mid-1992 and mid-1979 were prior lows for the poll, but this is the first time satisfaction has dropped below 10%. These low levels are usually indicative that change is coming, and politically, that’s just what we got in 1980 (Reagan) and 1992 (Clinton). There’s no reason to believe the outcome will be any different in this election either at this point.”

Source: Bespoke, October 7, 2008.

Bespoke: Cost benefit of lower commodities
“The impact of commodity prices on consumer’s wallets is now at its lowest levels of the year. With today’s decline in oil and most other commodities (besides gold), the average consumer is now saving an average of 62 cents a day compared to the start of 2008.