Treasury Secretary Paulson gets the Oscar for Worst Salesmanship in Support of a Financial Rescue Plan (Super-Heavyweight Division).

I think you’d be hard-pressed to find one person out of twenty who understands that Paulson’s bailout plan is not a transfer of tax money from the middle class to the wealthy. It’s not the slightest surprise that more than half of Congress would find it impossible to vote for.

Speaker Pelosi, on the other hand, gets the Oscar for Most Disingenuous Performance by a Legislative Leader Not Running For President. She looked so stupid and incompetent in not getting the bailout approved by the House yesterday, that one suspects this was somehow her plan all along.

The stock market, which had been led to expect approval of this piece of legislative sausage, promptly had an aneurysm and went on to its largest point loss in history, dropping nearly nine percent of its value on the day.

What happens next?

Read More →

Well, the sausage factory worked overtime this weekend. What a bizarre result we got.

Secretary Paulson came to Capitol Hill about ten days ago with a very simple, three-page plan to do something I could describe in three paragraphs.

Congressional Democrats gave us over one hundred pages of additional weirdness that is either ineffectual, noxious, off the point, or will work against the goals of the original Paulson plan.

Congressional Republicans clawed back a lot of the weirdness, and added in some weirdness of their own.

In the meantime, the public was led to believe that their pockets were being picked in order to make a small group of exceptionally wealthy men even wealthier. If you really believed that, then why would you even consider supporting this plan? The fear of losing their jobs is what made the Congressional leadership act as they did.

Read More →

During my daily chronicle of the Panic of 2008, I’ve had occasion once before to say that the fever has broken. That was a week ago Friday, after Secretary Paulson first announced the outlines of his plan to buy up to $700 billion in distressed mortgage-backed paper.

I’ve also had several occasions to tell you that officials at the Fed had taken extraordinary actions in the dead of night to stem an immediate emergency. This morning, it’s Congress’s turn.

Around 12:30am this Sunday, a gaggle of Democratic leaders, joined by Senator Gregg and Representative Blunt, announced that their labors were nearing completion, and the great Augean stables of Wall Street would be cleaned out.

Keep reading.

Read More →

We’ve all now been debating the Paulson mortgage-bailout plan for over a week now. We’ve been told endlessly that rapid passage of this plan is necessary to prevent an imminent meltdown in financial markets. That is actually not untrue.

But we’ve been told nothing to dispel the now widely-held perception that this bill calls for an immediate transfer of $700 billion (more than the Pentagon spends in a year) from the pockets of ordinary Americans into the coffers of a very wealthy few.

If that were true, I’d be marching in the streets in protest against this bill, too. In truth, the extensions that Democrats have added to the bill as their price for rapid passage, are much more accurately described as a transfer of wealth to a favored few, including some hard-left political activist groups.

The Democratic amendments that re-direct the profits from the bailout need to be stripped out of this legislation. And Congressional Republicans are the people who need to make that happen.

But let me tell you more about what the real Paulson Plan, not the fictitious one being reported by the media, specifically does. As you’ll see, if it works out, it could make Secretary Paulson the greatest trader in world history.

Read More →

At this moment on Friday morning, Congress looks set to do… well, there’s simply no information to answer the question. Members of both parties appear to be just as frozen in place as the credit markets, deeply fearful of being tarred and feathered by angry voters if they pass the Paulson bailout plan.

I’m going to leave aside the very interesting but not definitively-answered question of whether the Paulson plan will actually fix the economy.

I am going to address the question of what happens next if Congress fails to act. Or to put it another way: Congress believes that they land in the fry-pan if they pass the plan. But if they don’t, they’ll land in the fire. How hot is the fire?

Yet another way to ask this question is: what happens if we let Mr. Market handle the problem all by himself?

Read More →

And the fun and games on Capitol Hill will recommence soon. We’re still sorting out what happened yesterday to throw the Paulson bailout plan into a cocked hat.

The spin in the reporting this morning is that Barack Obama hopped up to support an alternative bailout plan proposed by several Republicans. The alternative has had little in the way of review by the Treasury Department, and very little chance of passage at this point.

Read More →

Published reports have it that Congress couldn’t get a deal done on the Paulson bailout plan. Sketchy reports at mid-day said that Congressional leaders had the outlines of a plan in place, with a raft of what appeared to be largely extraneous changes to the structure of the deal.

Evidently those modifications were intended to give Congress a way to second-guess the progress and implementation of the bailout. Financial markets figured that half a loaf was better than nothing, and they finished the trading day with moderate gains.

But tonight, the news is that there’s no deal after all.

Reliable information from Capitol Hill seems to have been blacked out for most of the day. The tenor of the published stories is that a small handful of Republicans in the House of Representatives are torpedoing progress.

My guess is that the Democrats, who are in total control of the proceedings, are well aware of both the critical need for this bailout, and also of the politically-inconvenient fact that the American people are disgusted and want no part of it whatsoever.

Consequently, it would make no political sense at all for the Democrats to pass the legislation on their own. They badly need a way to blame Republicans for it.

One supposes that the Democrats want the bailout to pass with just enough Republican support so they can call it a Republican bill that they were dragged into, kicking, screaming (and pork-barrelling) all the way.

That’s regardless of the facts that the bailout is needed to stabilize financial markets in the near term, and also that expert opinion is steadily moving in support of the idea that the bailout actually will improve conditions in the real economy.

It’s also regardless of the fact that the Democrats control both houses of Congress.

We’re not talking about a filibustered vote in the US Senate here. Nancy Pelosi, Harry Reid, and Barney Frank are the key players in this saga. They can do anything they damned well please with this legislation, and they need approval from not a single Congressional Republican to do it.

For the Democrats to blame a few Republicans for the failure to act is a craven lack of leadership. The country gave these people control of Congress in 2006 expecting they would do a better job than the Republicans.

And this is what we get, instead.

At this hour, markets are open in the Far East, but the critical credit-markets in London are not yet open for Friday trade.

Hours ago, when New York trading ended, it appeared that money markets were under extreme stress but not at the edge of panic.

The Fed funds rate centered around 1.5% for much of the week, averaged below 1.2% last night. The Fed’s target for this rate is 2%. There’s a distinct possibility of an emergency cut in policy interest rates, as early as the wee hours of this morning.

I would also look for additional emergency measures such as expanded currency swap-lines with foreign central banks, before New York opens for trading, a mere ten hours from now.

This is a hurricane warning. There is heavy weather ahead in financial markets. We’ve made an awful lot of history in the past ten days. We may be about to make some more.

-Francis Cianfrocca

The basic storyline in financial markets remains unchanged today, as everyone waits for Congress to act on the Paulson bailout plan. In the meantime, overnight conditions in the world’s money markets are again approaching the extreme stress levels we saw exactly one week ago. Keep reading…

Read More →

The attention of financial markets yesterday was fixed on the Congressional testimony of Treasury Secretary Paulson and Fed Chairman Bernanke. It was an up and down day, mostly down. Bernanke finally gave us an (elliptical) answer to one of the questions that most concerns Wall Street about the bailout plan: the valuation at which distressed mortgage-backed securities will be purchased. The other question, whether there will be a deal in Congress at all, remains unanswered.

Read More →

Yesterday morning, the new week started off on a hopeful note in world financial markets, as all eyes turned to the action in the US Congress. Secretary Paulson and Chairman Bernanke had managed to create enough fear among lawmakers to convince them that a large emergency bailout is needed, in order to repair the balance sheets of banks, Wall St. firms, and other financial intermediaries.

The mood darkened throughout the day as it appeared increasingly likely that there will be no deal in Congress, and no bailout. I’m going to fill you in on the flaws with the deal as currently proposed, the political action in Congress and elsewhere, and what happens if there’s no deal.

Read More →

We’re now into our second day of market reactions to the Treasury and Fed’s Troubled Assets Relief Program (“TARP”), or if you prefer, Mother of All Bailouts (“MOAB”). Market reaction in general is quite positive, which I’ll get to shortly. But the action is moving to Capitol Hill, where Paulson and Bernanke need to convince Congress to pass enabling legislation for the plan before they leave on Friday to face the voters. I’ll tell you how that’s going so far. And I’ll also tell you what questions Congress needs to ask, so that we all can get a better understanding of how the TARP will actually work.

Read More →

Let me tell you a story about mortgage-backed securities purchased with borrowed money (”leverage”).

An MBS is basically a package of individual home mortgages pooled together so that it can be priced and analyzed like a bond. (And usually the pool is also divided horizontally into credit-quality tranches too.)

MBS are a big hit with institutional investors, because their bond-like analytics made it possible to do something they’ve been wanting to do for decades, which is to gain exposure to the US mortgage market. (Compared to almost any other kind of asset, a mortgage has higher credit quality. Most people, when they get squeezed, will pay their taxes and their mortgage and let their other bills slide.)

And Wall Street firms were thrilled with this piece of financial engineering because the bundling and marketing of MBS generated enormous fee income. And like the drug dealer who uses his own product, Wall Streeters often bought the higher tranches of MBS for their own accounts too. (Bear Stearns and Merrill Lynch were particularly guilty of this.)

So how do you make a good thing better? You buy it with borrowed money. All over the world these last few years, there’s been a tremendous amount of buying of MBS by banks, Wall Street firms, insurance companies like AIG, hedge funds, even money market funds and small towns in Norway.

No less than Fannie Mae and Freddie Mac bought acres and acres of this paper.

And many of these players used funds borrowed from banks and from the overnight money-markets to buy it. If you want one single root cause, one thing to blame for the financial crisis out of all the rest, this is it.

Here’s how it happens…

Read More →

It was a day of unprecedented volatility in the credit and money markets. The prices of short-duration Treasury securities traversed ranges that are usually seen across entire interest-rate cycles. In a single day.

The stock market, which started the day about 900 points below its level of a mere week ago and kept falling, suddenly turned euphoric and rocketed about 600 points from the low that it reached at 1pm EDT.

What happened to change the mood? Henry Paulson announced that he and Ben Bernanke are planning to construct a government entity that will take ownership of much of the “bad paper,” or distressed securities, from Wall Street.

In essence, they’re planning to save the free market system by killing it.

It was just what battered, exhausted, shell-shocked and weary traders wanted to hear.

Let me tell you a few things about it…

Read More →

The combination of investment bank failures, the nationalization of America’s largest insurer, and most especially the disruption of money markets have brought us to a very delicate moment.

Which shoe will drop next? There are at least two possibilities. That’s one question. Another question is: how many bullets does the Fed have left in its gun?

Read this through to the end, because that’s where the good news is.

Update: I started writing this piece around 3AM. At just about that moment, the Federal Reserve announced the coordinated liquidity actions I mention at the bottom of this piece. As of 7:45AM EDT, these actions have added a certain amount of calm to credit markets, with overnight dollar LIBOR falling from 5% yesterday to below 4%. We’re expecting a stock market rally in New York of perhaps 200 points on the open.

Read More →

Just when you thought things couldn’t get any weirder comes a disaster that will affect a great many ordinary people in the pocketbook: the Reserve Fund’s Primary Fund has suspended withdrawals.

The Primary Fund is a money-market fund. The kind of fund where you put your cash for short periods of time to get a higher interest rate than on passbook savings.

The whole selling-point of these funds is that they’re unquestionably safe and unquestionably liquid. You get your money back out of them with interest, whenever you want it.

Until today. The Reserve/Primary Fund’s net asset value is now 97 cents. (They “broke the buck.”) That implies a loss to principal. You get less back than you put in.

To go along with this, the Fund has suspended customer withdrawals for seven calendar days, which kills the liquidity promise as well.

There are already signs of extreme disorder in the overnight-repo markets in reaction to this news, even as stock markets prepare for a mild rally in response to the AIG acquisition.

This has the potential to become a very major story, folks. Stay tuned.

-Francis Cianfrocca

There’s no way to understate the enormity of what happened yesterday evening, ladies and gentlemen. Yesterday morning, I wrote in this space that it was the first day of the rest of Wall Street’s life.

But then, the Federal Reserve rebooted the financial world. Today is the first day of a brand new life.

The events of the past four days have been so momentous and so unprecedented that they need a name. Let’s call it The New Trade.

The United States acquired AIG Incorporated, the largest insurance holding-company in the country, and an entity regulated not by any Federal body, but by the State of New York.

An enormous amount of anger has already been expressed in the few hours since the deal was announced. I’m going to refrain from adding to that.

It’s as if you woke up to find the sun rising in the west rather than the east, in a sky that’s green instead of blue. It’s hard to be angry about a change like that. I’m still trying to grasp the full dimensions of what has changed.

So rather than tell you what I feel, I’m going to tell you what actually happened, to the best of our knowledge, and hopefully give you a perspective you won’t get anywhere else.

Read More →

Yesterday was the first day of the rest of Wall Street’s life. At the beginning of this year, there were five major broker-dealers. In March, the Bear Stearns Companies were acquired by JP Morgan Chase with a large assist from the Federal Reserve.

Yesterday, Lehman Brothers filed for Chapter 11 bankruptcy. On Sunday, Merrill Lynch agreed to be acquired by the Bank of America.

As we proceeded through the morning hours, I felt that the flurry of selling on nearly all markets wasn’t as disorderly or panic-stricken as could well have been feared, and on the whole things were proceeding reasonably well. That was then.

As the day wore on, reports starting coming in about AIG Inc.,the large insurance holding-company. And things started getting worse.

It’s easy to think that we’re now in the worst financial crisis since the Great Depression. That’s partly because no less a figure than Barack Obama (who would dearly like a chance to show us how little he really knows about finance) has told us so.

But we’ve had several periods of extraordinary and sustained distress quite recently. They just flew under the radar and got little or no mass media attention. The first was last August, and the second was in March.

It’s one thing for messianic but poorly-informed Presidential candidates to use scary words. But when participants in the money and credit markets start using words like “Armageddon,” I take that much more seriously. Yesterday we saw clear signs that the financial world is in the grip of extreme fear, the same signs that were in evidence a year ago and a half-year ago.

Let me tell you what those were…

Read More →

As I described here, this is the weekend that the Treasury and the Federal Reserve decided to stop bailing everyone out. Secretary Paulson has been hinting for weeks now that we have to let capitalism work the way God intended it to. Which means: if you screw up, you die.

This is what we free-market conservatives have been saying we wanted all along, folks. We’ll be getting a chance to eat our own dog food. On balance, I have to say it’s a good thing… I hope.

We are now going to see the unwinding of the 158-year-old broker-dealer Lehman Brothers. The regulators are going to try this another way, and they decided to let Lehman die without the benefit of an overt and specific public bailout, as had been the case with Bear Stearns and Fannie Mae/Freddie Mac.

Lehman, which had been the fourth-largest Wall Street broker-dealer, will declare bankruptcy. Meanwhile, the third-largest, Merrill Lynch, will be acquired by Bank of America in a deal that values Merrill at about half what it was worth a year ago. The last two left standing, Morgan Stanley and Goldman Sachs, are strong and not in danger. (Not today, anyway.)

The AIG Companies, an insurance-holding group, is said to have sought a bridge loan from the Fed, as it seeks to raise desperately-needed capital by selling assets. AIG has sold a large amount of credit-default swaps, many of which may be triggered in the next few hours and days.

There have been reports that Merrill was ordered to sell itself, by authorities at the Fed. If so, someone must have wanted to pull off all the scabs at once. The blood is running in Wall Street this morning.

The Federal Reserve did announce last night that its various emergency-liquidity facilities would be significantly broadened and expanded in scope. If you’re so inclined (and I am), you can consider this another kind of bailout. But the Treasury and the Fed both refused to give Wall Street what the latter were looking for, which is an explicit public guarantee of Lehman’s distressed assets. It’s a completely new chapter in the Panic of 2007. (And 2008. And 200…)

Whether Lehman’s assets and trading positions are liquidated in an orderly or disorderly fashion will determine the tone of the next few weeks in financial markets.

And it could also determine the tone of the real-world economy, of jobs, goods and services, for the next year or more.

This morning, more or less as expected, markets are in shock. China and Japan didn’t trade overnight due to national holidays. Singapore, Taiwan and the Phillipines all saw sharp losses in their stock markets. European stocks are also sharply lower, and US stocks in Europe are trading several percent down. Best guess, US stocks will lose at least a few hundred points today.

US Treasury securities, meanwhile, are on the biggest rally in months. The dollar opened weaker overseas but has steadied. European and British monetary authorities have announced that they’re ready to support their money markets aggressively, should the need arise.

Hang on tight, everyone. This is a hurricane warning.

-Francis Cianfrocca

Ladies and Gentlemen, I’ve been faithfully chronicling the global credit and financial crises for you since the first cracks started appearing in early summer of last year.

Tonight, with the almost-certain collapse of the investment bank Lehman Brothers, the crisis moves into a new and possibly very dangerous phase.

I’m going to keep you up-to-date on the key developments over the next few days, or longer if necessary, and give you as much analysis as there is time for.

The extraordinary events of this weekend will go down in history. To me, at this early point, I think there are instructive parallels to the financial crises of 1907 and 1987. Read on for a roundup of the events of the last two days.

UPDATE: Bank of America is expected to acquire Merrill Lynch, the third-largest Wall Street investment bank, for about $29/share, which is a large premium over MER’s Friday close just above $17, and far below its 52-week high above $78.

Read More →

It’s been widely reported that Timothy Geithner (the President of the New York Fed) summoned a group of Wall St. and banking CEOs to a pow-wow in lower Manhattan on Friday evening, with Treasury Secretary Paulson in attendance.

The subject: Lehman Brothers, the 158-year-old investment bank which is in dire need of new capital, partly because of losses in its large portfolio of commercial (not residential) real-estate investments.

Reports have it that Geithner essentially told the assembled CEOs that they would have to find some way to resolve the situation, possibly by hammering out a plan to buy up Lehman’s assets. You may recall that Geithner’s predecessor Bill McDonough did something very similar, almost ten years ago to the day, resulting in a partnership that took over the Long-Term Capital Management hedge fund.

In 1998, the only thing the Fed paid for was coffee and sandwiches. (They hosted the meetings so they would be held on neutral turf.)

Today, given both the precedent of the Bear Stearns collapse, and the fact that Fed discount-window lending is now available to Wall St. firms, it’s by no means certain that the Fed and/or the Treasury won’t be partners in whatever deal emerges for Lehman Brothers this weekend. As with Bear Stearns, any government participation would most likely involve the guarantee of investments or derivatives that are illiquid, hard-to-understand, of questionable credit quality, or all of the above.

Several times in the last few days, Secretary Paulson got out his daddy face (which is darned intimidating, let me tell you) and said that the government will not commit any public funds to guarantee any part of Lehman Brothers.

That’s a very good position to take, because we’ve been bailing out one thing after another this year, and it has to stop sometime.

Right here would be a great place to draw a line in the sand. We don’t really need Lehman Brothers to survive in its current form, 158 years of history or not.

The biggest problem with Paulson and Geithner’s position is that they don’t have a lot of leverage. Lehman’s competitors would be perfectly happy to see Lehman (and their CEO, Richard Fuld, who has been faulted for not addressing the problems long ago) go the way of Bear Stearns.

Unfortunately, I think Paulson is going to blink. It’s going to be yet another interesting weekend in finance-land.

-Francis Cianfrocca