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.