The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 2.73 percentage points earlier today, the highest since Sept. 18, when it was 3.13 percentage points, the most since Bloomberg began compiling the figures in 1984.
Update: There is much more here, including a longer term short.
And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from “troubled financial institutions” to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.
In effect, the Treasury will have the fate of the American taxpayer in its hands. The Resolution Trust Corp., created in the late 1980s to deal with the savings and loan crisis, dealt with previously purchased real estate, which was flushed into government hands with a “best efforts” future liquidation. Today, the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below “par” or cost, and prospectively at levels allowing for capital gains. This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction — financial derivatives — that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.
Very soon thereafter, CNBC said it was not true.
Journalists like simple stories with clear-cut villains who are easy for readers (and journalists themselves) to recognize. And so, as the financial crisis has brought Wall Street to its knees in recent weeks, it’s become so much easier for journalists to cope. Time Magazine, for instance, tells us in its current issue that Wall Street “sold out” America, while the New York Times decries “Wall Street’s ”¦.real estate bender.” John McCain has helped out the scribes by attributing the problems we now face to greed on Wall Street.
Listening to this sort of chatter, it’s easy to forget that this mess began with a heap of bad mortgages made by American consumers who never came within a hundred miles of the card sharps on Wall Street. The inability (and in a good deal of cases, the unwillingness) of these same ordinary Americans to pay back these loans, many of which are sitting in mortgage backed-securities held by institutions around the world, helped tilt us toward this systemic threat to our financial system. And even as we focus on bad bets and lousy leverage ratios on Wall Street, these toxic mortgages continue to unwind, and as they do, we are getting a better look at how they were made””and it’s not pretty. If it wasn’t clear before, it should be now, that speculation and fraud””much of it on the part of borrowers””were rampant.
As I have observed before, mortgage fraud soared in the run-up to this mess, and believe it or not, it’s continuing to rise. The FBI says that reports of suspicious mortgage activity increased by 10-fold from 2001 through 2007, and rose another 42 percent in the first quarter of 2008.
As Setser and Duy pointed out, we got a subsidy of $1000 a person from our friendly foreign funding sources. The bailout bill $700 billion figure (which could be larger, since that is the maximum outstanding at any one time; the real limit is the increase in the debt ceiling) amounts to $2000 a person. Will our creditors play ball and lend us the money? It isn’t at all clear that they will, at least at current interest rates. They have become decidedly cool on buying agency paper. The man on the street in Asia and Europe is taken aback by the events of the last two weeks. Funding the US has become controversial in China, and may be in other major lenders. And a rise in interest rates would considerably undermine the supposed benefits of the program.
The sorry fact is the US has consumed at an unsustainable level. We need to reduce consumption and increase savings (and reducing debt is a form of savings).
Read it all and especially take the time to look at the main useful charts.
The most obvious solution is to pay more than 25 cents on the dollar and then demand something in return for the premium ”” namely, a stake in any firm that participates in the bailout. Congressional Democrats have been pushing for such a provision this week, and it’s one of the most important things they have done.
The government would then be accomplishing three things at once. First, it would take possession of the bad assets now causing a panic on Wall Street. Second, it would inject cash into the financial system and help shore up firms’ balance sheets (which some economists think is actually a bigger problem than the bad assets). And, third, it would go a long way toward minimizing the ultimate cost to taxpayers.
Why? The more that the government overpays for the assets, the larger the subsidy it’s providing to Wall Street ”” and the more it is pushing up the share prices of Wall Street firms. As Senator Jack Reed, Democrat of Rhode Island, notes, the equity stakes allow the government to recapture some of the subsidy down the road. It’s a self-correcting mechanism.
Some details of a bailout will have to remain vague, in part so that Treasury officials have the flexibility to respond to an obviously fluid situation. But Congress can still do a lot this week to make sure the final cost is a lot closer to, say, $100 billion than $700 billion.
By a margin of 55 percent to 31 percent, Americans say it’s not the government’s responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.
A difference in beliefs within the Episcopal Church is distressing, but is not necessarily reason to leave. Unfortunately, many of those who hold “progressive” beliefs have gone further than disagreeing with Christian tenets. They have hijacked the denomination into which I was confirmed more than 30 years ago.
These leaders have become intolerant of the traditional Christians in their midst and have sought systemically to suppress those whose beliefs remain Christian by refusing to ordain or appoint them as priests or bishops. Faced with the inability to worship and witness as our faith dictates, we have sought to leave and maintain our membership in the worldwide church from which the Episcopal Church has alienated itself.
In response, we have been harassed by those who call themselves tolerant, as the deposition of Bishop Duncan illustrates. Remember, he was deposed in anticipation of an act not yet taken and with the intent to intimidate those in the Pittsburgh Diocese who soon will be voting on whether to leave the Episcopal Church. We have even been asked to heed his deposition as a warning.
As a good (and agnostic) friend of mine exclaimed, “If they don’t believe in what the church teaches, let them leave and create their own group.” Since they haven’t, and since they have sought to silence us, we must leave.
The congregation – which was formed in 1847 to minister to the spiritual needs of Irish weavers and their families who came over in the wake of the Irish potato famine – has had many ups and downs in its 160-year history.
But sadly, despite modest growth in numbers over the past year, there has not been sufficient support for the congregation for them to justify the large amount of money which would need to be spent repairing the building.
Surveyor’s reports over the past eight years indicated that there were several structural problems which would require extensive remedial work. The congregation at the time was at a low ebb and did not feel able to spend large amounts of money on the building.
However, since then, the deterioration has worsened to the extent that the chancel is no longer used for health and safety reasons.
Under the Bretton Woods system, worried foreign creditors would long ago have cleaned out Fort Knox. But, conveniently, the dollar is uncollateralized and unconvertible. America’s overseas creditors hold it for many reasons. Some ”” notably Asian central banks ”” acquire dollars simply to help make their exports grow. But even the governments that scoop up dollars for no better reason than to manipulate their own currency’s value presumably put some store in the integrity of American finance.
As never before, that trust is being put to the test. In the best of times, the Treasury and the Federal Reserve pretended as if the dollar were America’s currency alone. Now, in some of the worst of times, Washington is treating its vital overseas dollar constituency as if it weren’t even there.
Which failing financial institution will the administration pluck from the flames of crisis? Which will it let roast? Which market, or investment technique, will the regulators bless? Which ”” in a capricious change of the rules ”” will it condemn or outlaw? Just how shall the Treasury secretary spend the $700 billion he’s begging for? Viewed from Wall Street, the administration’s recent actions appear erratic enough. Seen from the perch of a foreign investor, they must look very much like “political risk,” a phrase we Americans usually associate with so-called emerging markets, not with our own very developed one.
Where all this might end, nobody can say. But it is unlikely that either the dollar, or the post-Bretton Woods system of which it is the beating heart, will emerge whole. It behooves Barack Obama and John McCain to do a little monetary planning. In the absence of faith, what stands behind a faith-based currency?
More than a year before it ‘broke the buck’ with losses that spread chaos through the financial system last week, the Reserve Primary Fund began loading up on a type of short-term debt that the money-market fund had long shunned.
Even as Bruce Bent, the fund’s founder, told shareholders in a July 2008 letter that the fund had ‘unwavering discipline focused on protecting your principal,’ Reserve was gobbling up commercial paper. By May of this year, 54% of the fund’s holdings were in commercial paper, up from 0.9% about a year earlier. Exposure to drab but safe certificates of deposit plunged.
While the run on money funds that was ignited by the fund’s losses has eased, Mr. Bent’s failure to follow his own advice on the virtues of conservative investing is having catastrophic consequences for Reserve’s money-market funds, managed by Reserve Management Co.
The firm lost 90% of its assets, which had fallen to $8.5 billion as of Monday, down from nearly $86 billion at the start of September, according to iMoneyNet Inc. Reserve faces at least two lawsuits over its disclosure of losses on soured Lehman Brothers Holdings Inc. securities and indefinite suspension of further redemptions.
This spring, Disney pop star Miley Cyrus became the center of a media backlash when Vanity Fair released photos of the Hannah Montana lead in nothing more than a sheet. While the magazine is known for pushing boundaries of propriety, these images were particularly troubling due to the age of the star (15) and those who emulate her (girls as young as 8). The images illuminated the way children younger and younger are becoming players in a sexual culture traditionally reserved for adults.
How did children come to be seen as sexually available as adults? M. Gigi Durham contends in The Lolita Effect: The Media Sexualization of Young Girls and What We Can Do About It (4 stars) that the sexualization of children, especially young girls, is largely perpetuated by print and electronic media. Durham’s title evokes Vladimir Nabokov’s 1955 Lolita, a modern classic about a French scholar who falls in love with a 12-year-old. What does the Lolita Effect look like today? “Adult sexual motifs are overlapping with childhood””specifically girlhood, shaping an environment in which young girls are increasingly seen as valid participants in a public culture of sex.” Durham, a University of Iowa communications professor, argues that the Lolita Effect harbors a special interest in those less discerning about sexual boundaries.
Whether or not tomorrow’s accounts of today’s turmoil prove David Owen of Dresdner Kleinwort right; whether or not this is the beginning of the end of the dollar’s pre-eminence in the world’s central banks and foreign exchanges, the economic landscape has undoubtedly changed forever.
The US taxpayer bail-out of America’s banking sector is an event whose significance will reverberate for many years. What it means for free markets, for the way Western economies are run, for the prosperity of the world economy, must remain to be seen.
But as investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable ”“ the US dollar will have to take another major fall.
Iran’s president addressed the U.N. General Assembly Tuesday declaring that “the American empire” is nearing collapse and should end its military involvement in other countries.
Iranian President Mahmoud Ahmadinejad said terrorism is spreading quickly in Afghanistan while “the occupiers” are still in Iraq nearly six years after Saddam Hussein was ousted from power in Iraq.
“American empire in the world is reaching the end of its road, and its next rulers must limit their interference to their own borders,” Ahmadinejad said.
He accused the U.S. of starting wars in Iraq and Afghanistan to win votes in elections and blamed a “few bullying powers” for trying to undermine Iran’s nuclear program.
The Rev Jim Cotter said the service celebrating the civil partnership of the two women was a “day of great delight and healing”.
However a complaint was made and he has now been reprimanded by the Archbishop of Wales, Dr Barry Morgan.
It is the latest example of priests defying Anglican Communion guidelines over homosexuality – which state that practising homosexuals should not become clergy and same-sex unions cannot be blessed in church – in a row that has driven the 80 million-strong worldwide church to the brink of schism.
With financial markets in flux and a massive government rescue package in the works, financial reporter and New York Times columnist Gretchen Morgenson looks into what’s involved in the nearly $700 billion deal.
One central concern: The way troubled banks’ assets get valued when the federal government buys them. “Depending on how [the bailout program] is operated, and how the assets are valued before taxpayers are forced to buy them, it could bloat our final bill for this mess while benefiting the very institutions that got us into it,” Morgenson wrote in a recent column.
Morgenson talks to Terry Gross about strategies the government might employ to value the assets taxpayers are buying from endangered institutions ”” and how regulators might earn back some of the trust they’ve lost in recent weeks.
There are only seven basic plots in literature. One of them, surely, must be “cry wolf”. Last week, a variation on the “cry wolf” story emerged which, in its long-term impact, threatens to be far more dangerous to Western civilisation than any banking collapse.
Reports emerged that Sharia had been enshrined in English law. According to one newspaper: “Five Sharia courts have been set up in London, Birmingham, Bradford and Manchester and Nuneaton, Warwickshire. The Government has quietly sanctioned that their rulings are enforceable with the full power of the judicial system, through the county courts or High Court.”
Cue outrage and condemnation. But Muslim organisations dismissed the story as nonsense. And they were backed by the Government. As the Ministry of Justice and Department for Business, Enterprise & Regulatory Reform put it in a joint statement: “Sharia law is not part of the law of England and Wales and the Government has no intention of making any change that would conflict with British laws and values.”
So can we all breathe easily again? If only. Sharia may not be enshrined in English law, but the real impact of Sharia is just as worrying.
1. You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word “Contained.” Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago.
Question: Why should we trust your judgment on the largest bailout in American history?
2. How are you pricing the purchase of these damaged assets? Is the taxpayer paying 22 cents on the dollar? 5.5 cents? If there is no market price for this junk paper, how are you going to determine a purchase price?
President Bush’s proposed solution, which he wants Congress to authorize immediately, tells taxpayers to write a check for $700 billion and trust the government and Wall Street to do the right thing ”” with inadequate regulation and virtually no oversight.
We agree with Senator Barack Obama that the administration’s plan lacks regulatory muscle, and we agree with Senator John McCain when he said: “When we’re talking about a trillion dollars of taxpayer money, ”˜trust me’ just isn’t good enough.”
Nearly everyone agrees that the there will have to be another very big bailout. The financial system, gorged on its own excesses, cannot stabilize without intervention. The $700 billion would be used to buy up the bad assets that are presumably clogging the system.
To protect the American taxpayer, Congress must ensure that the bailout comes with clear ground rules and vigilant oversight. In an appalling, though familiar fashion, the ground rules proposed by the Bush administration are wholly unacceptable ”” as are its tactics.
Most economists accept that the nation’s financial crisis ”” the worst since the Great Depression ”” has reached such perilous proportions that an expensive intervention is required. But considerable disagreement centers on how to go about it. The Treasury’s proposal for a bailout, now being negotiated with Congress, is being challenged as fundamentally deficient.
“At first it was, ”˜thank goodness the cavalry is coming,’ but what exactly is the cavalry going to do?” asked Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist, and now a fellow at the Brookings Institution in Washington. “What I worry about is that the Treasury has acted very quickly, without having the time to solicit enough opinions.”
The common denominator to many reactions is a visceral discomfort with giving Treasury Secretary Henry Paulson Jr. ”” himself a product of Wall Street ”” carte blanche to relieve major financial institutions of bad loans choking their balance sheets, all on the taxpayer’s bill.
There are substantive reasons for this discomfort, not least concerns that Mr. Paulson will pay too much, thus subsidizing giant financial institutions. Many economists argue that taxpayers ought to get more than avoidance of the apocalypse for their dollars: they ought to get an ownership stake in the companies on the receiving end.
The financial markets are in quite fragile condition and I think absent a plan they will get worse,” Bernanke said.
Ominously, he added, “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”
GDP is a measure of growth, and a decline correlates with a recession.
Dodd later spoke disparagingly of the administration’s proposal. “What they have sent us is not acceptable,” he told reporters after presiding over a lengthy Senate Banking Committee hearing at which Bernanke and Treasury Secretary Henry Paulson urged swift action by Congress.
The Archbishop of Canterbury Dr Rowan Williams is facing growing pressure to create a new Anglican province for conservatives after a leading evangelical was effectively defrocked in the US.
Six senior Church of England bishops have come out in support of deposed US bishop Bob Duncan, declaring themselves “deeply saddened and shocked.”
Headed by the Bishop of Winchester, the Right Rev Michael Scott-Joynt, the Bishops of Blackburn, Chester, Chichester, Exeter and Rochester joined in declaring their belief that the deposed Bishop of Pittsburgh remains “a bishop in good standing in the Anglican Communion.”
In an interview with The Times, the Bishop of Rochester Dr Michael Nazir-Ali said the time had now come for Dr Williams to create a new province for conservatives in the US.
Another senior bishop, a former primate of the Southern Cone province in Latin America, also wrote an open letter to Dr Williams demanding the immediate suspension of The Episcopal Church from the Anglican Communion and for the recognition of a new conservative province.
Inspired in part by Paul Volcker, Nicholas Brady and Eugene Ludwig, and announced last week, the Paulson plan is a pure establishment play. It would assign nearly unlimited authority to a small coterie of policy makers. It does not rely on any system of checks and balances, but on the wisdom and public spiritedness of those in charge. It offers succor to the investment banks that contributed to this mess and will burn through large piles of taxpayer money. But in exchange, it promises to restore confidence. Somebody, amid all the turmoil, will occupy the commanding heights. Somebody will have the power to absorb debt and establish stability.
Liberals and conservatives generally dislike the plan. William Greider of The Nation writes: “If Wall Street gets away with this, it will represent an historic swindle of the American public ”” all sugar for the villains, lasting pain and damage for the victims.”
He approvingly quotes the conservative economist Christopher Whalen of Institutional Risk Analytics: “The joyous reception from Congressional Democrats to Paulson’s latest massive bailout proposal smells an awful lot like yet another corporatist love fest between Washington’s one-party government and the Sell Side investment banks.”
Thanks to their criticism, the plan will be pinned back. Oversight will be put in place. But the plan will probably not be stopped. The markets would tank. There is a hunger for stability, which only the Treasury and the Fed can provide.
So we have arrived at one of those moments. The global financial turmoil has pulled nearly everybody out of their normal ideological categories. The pressure of reality has compelled new thinking about the relationship between government and the economy. And lo and behold, a new center and a new establishment is emerging.