Monday, March 17, 2008

Question for the FED: Where Do You Draw the Line?

Can things get more interesting? Another banner day in the financial world. During an average day I can run through feelings of mirth, anger, outrage, glee, and sadness. Crazy times indeed. Thanks to all that continue to stop by and provide feedback. I hope I am able to provide content that is both entertaining and helpful going forward.

Headline News - Presentation and Perception
I like headline reading because you can gleam quite a bit of information by how objective data is presented in order to garner a particular perception. You can learn the bias of the piece as well as the desired take home point. This is not a commentary for or against such practices, surely I use my own topic headlines in this way, just an observation that many would do well to understand. When you are reading Yahoo Finance, CNN Money, CNBC, or any major news feed you need to know that the information will be presented in a certain way that best fits the worldview of that source.

There have been a bunch of headlines over the past 24 hours that have covered the buyout of Bear Stearns as if it was the single greatest thing of all time. Headlines like "FED and JP Morgan Avert a Crisis" or "FED Rescues Troubled Banks". The tenor of the splashy headlines are one of relief and congratulations for a job well done. What if the headlines printed today read instead:

"FED Forced to Use Depression Era Tactics to Prevent Banking Collapse" or perhaps "FED and JP Morgan Postpone Realistic Pricing of Worthless Mortgage Paper". All the headlines are true enough in their own right, but convey very different visions of current events. I know that most people that stop here can figure this out for themselves, but I thought I would point it out anyway!

Question for the FED: Where Do You Draw the Line?
I am not going to rehash the whole moral hazard argument concerning the recent wild activity by the FED. Any reasonable person with half a brain can see that what is going on here is criminal and wrong. There is not much to debate.

Instead I wanted to try and some answers from the FED as to where, if at all, they are going to draw the line on bailing out the banks that are toasted. I in no way expect an answer, but I thought I would ask anyway!

So where does the FED draw the line? Obviously BSC was deemed too important to let collapse fully, hence the sale to JP Morgan. How about Morgan Stanley? Lehman Brothers? What about the local mini bank? What is the criteria the FED is using? Again, we do not know, and they will never tell us, but it is an important point.

How much money will be made up and promised to help the banks? 500 Billion? 1 trillion? 2 trillion? We have no idea. This is also extremely important.

There are quite a few more questions I have, but my take away point is this; The FED is acting fast and furious right now and they may be setting precedents that are hard to deliver on later. By all serious analysis we are still in the early stages of this banking crisis. The commercial real estate end of things has yet to start to crumble for crying out loud! Even if just residential real estate gets only slightly worse, many banks are going to get killed. What is the FED plan for a large scale issue? By acting so fast and without regard to future conditions, the FED is providing a potentially false backstop for troubled banks. Add to this that banks now are going to hold on for dear life and play the mark to model game to make it the end of the month so they can cash in on the new TSLF funding facility.

It is clear to this blogger that the FED is stalling for time. How much time can they buy? I guess we are going to find out. The FED rate cut is coming tomorrow and that may give an idea how bad the FED feels the situation is. Markets are now fully expecting 75bps, but really 100bps is what is seen as "good". The Dollar had it's usual pre FOMC runup today by day's end, so the FED may go for the 100bps. Anything less may cause Wall Street to have a furball fit. Should be interesting.

Easter Bunny Comedy
If I was a kid I would be terrified if this Easter bunny showed up!


Have a good night.


Anonymous said...


Your are correct, they are stalling to the extent the they want congress and W to pass some kind of taxpayer give away bill. Soon they are going to reach the limit on rate cuts, the real helicopter money is going to come from government giveaways, the 300 check or whatever is not going to be enough. So far Congress and W haven't been able to agree on more but I think that will be changing soon enough.


watchtower said...

Holy cow! I wonder how much that rabbit weighs?

As far as the economic situation, I'm starting to notice that even the MSM seems to be picking up on it. The family and I went to the mall this weekend, but the news has apparently not affected the locals where I live. The mall was packed, more so than at Christmas time. When I was walking down the mall, I started to think, maybe I'm blowing all this economic stuff out of proportion. Surely all these people wouldn't be walking up and down the mall with their bags of goodies if the economy really was teetering on the edge of the abyss. But then again, British billionaire Joe Lewis had his hat handed to him by his Bear Stearns "investment".

It just seems surreal sometimes.

What was I doing at the mall? I have no idea, if it wasn't for the Italian resturant in the place, my wife would have a hard time getting me in there.

Anonymous said...

I too agree that the Fed is stalling for time - perhaps wishful thinking time.

This morning was the first time our local paper has mentioned the meltdown in the financial sector but it was a very soft article- Bear Stearns had a problem, but the Fed and JP Morgan came to the rescue. With pithy quotes that we have a strong economy, blah blah. "Everyone go about your business and go shopping!" Their only reporter who understood business topics was re-assigned in their recent downsizing. No one there has a clue what is happening in the finance world.

And so yes, very few people seem to understand what is happening around them today.

getyourselfconnected said...

I hate to use biology type analogies, but I think that two fit;
1.) the FED's efforts to provide "liquidity"- the FED is trying to treat a SYMPTOM, not a cause by giving out cash. The cause is insolvency, the symptom is lack of fluid cash due to declining asset values. As an analogy, if someone presents with chronic bad high blood pressure, say 150/110 constant they need treatment. I can find the CAUSE (renal failure, diabetes, vascular disease) which may or may not be treatable, or I can just treat the symptom. One treatment is puncturing the vena cava artery, which will drop blood pressure in short order, but the patient will die. See what I am saying.
2.) As far as things seeming to be fine on main street, realize that the usual 1st sign of a coronary blockage (ie heartattack) is sudden death or major cardiac event. No pain, no other symptoms exist prior. Things can be great until they are not and it can be very sudden.
Sorry for the biological analogies, but I felt they fit.
Thanks for stopping in!