Today’s big news is that the Fed has made moves to “restore liquidity” to the tight credit market. What this amount to of course is a $200 billion bailout of the banks.
The Federal Reserve on Tuesday announced it is ramping up efforts to provide more relief in the spreading credit crisis, saying it will make up to $200 billion in cash available to cash-strapped financial institutions.
The Fed said it will lend the money to financial institutions for a term of 28 days, rather than overnight. The action is being coordinated with central banks in other countries to try to provide help in a global credit crises that threatens to push the U.S. economy into its first recession since 2001 if it hasn’t already.
So how does that work? The banks are getting this money for 28 days, and then what? What does the Fed get in return that’s worth $200 billion?
A closer look reveals why this is really a bailout.
The Federal Reserve plans to lend up to $200 billion of Treasury securities in exchange for debt including private mortgage-backed securities that have slumped in value as homeowners defaulted on their payments.
Banks are getting cash in exchange for worthless securities. The Fed will now get stuck with them, and the securities will only decrease in value as the housing depression continues. No wonder Wall Street is thrilled. The losses banks have incurred from subprimes are not only getting wiped out, but the Fed is taking those toxic securities off their hands.
The banks have a new tune to sing, a cover of Dire Straits. “Get your money for nothing and your checks for free. (I want my, I want my, I want my F-E-D!)”
Even better, this effort has international backing to it…and an international effort to give away cash.
The Federal Open Market Committee authorized increasing currency swap lines with the European Central Bank and Swiss National Bank to $30 billion and $6 billion, respectively, increasing the ECB’s line by $10 billion and the Swiss line by $2 billion. The Fed extended the swaps through Sept. 30.
The ECB announced it will lend banks in Europe up to $15 billion for 28 days and the SNB announced a similar auction of up to $6 billion. The Bank of England will offer $20 billion of three-month loans on March 18 and hold a further auction on April 15. The Bank of Canada announced plans to purchase $4 billion of securities for 28 days.
Treasuries slid after the announcement, with yields on 10- year notes rising to 3.56 percent at 9:11 a.m. in New York, from 3.46 percent late yesterday.
Traders removed bets on the Fed to lower its benchmark rate by a full percentage point, to 2 percent, by the end of the next meeting on March 18, futures showed. The contracts indicate a 60 percent chance of a 0.75 percentage-point reduction.
The Fed’s auctions of Treasuries, which will begin March 27, may be secured by collateral including agency and private residential mortgage-backed securities, the Fed said. The central bank “will consult with primary dealers on technical design features” of the new tool.
Primary dealers are a group of 20 banks and securities firms that trade Treasuries directly with the Federal Reserve Bank of New York.
In other words, the banks have finally found a buyer for these poison packages of debt: The US Government. Around the world other central bankers are following suit. It brings to mind those sweetheart deals where a sports team leases the land from the city for a stadium for a dollar a year.
Of course this effort will do nothing to solve the underlying problem of the housing depression, the commodities bubble, or the freefalling dollar. But it gets the banks off the hook for subprimes by throwing more money at the problem, that’s the Fed way.
And the Monoline Nuke and the trillions in derivatives it will destroy in its wake is still looming over all of this mess.
Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor’s and Moody’s Investors Service haven’t cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.
None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.
Tick, tick, tick. People know the monolines are being held up by sheer will, spit, bailing wire, and the world pretending that the problem doesn’t exist.
Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that’s triggered $188 billion in writedowns for the world’s largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.
So after today’s $200 billion bailout, what happens when THIS mess explodes in our faces? Another round of “liquidity measures”? When the Fed says “auction” it means “giveaway”. Money for nothing and your checks for free…keep that in mind.
“The fact that they’ve kept those ratings where they are is laughable,” said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. “Downgrades of AAA and AA bonds are imminent, and they’re going to be significant.”
It’s only a matter of time before the next wave of the tsunami hits. It will be much larger, and cause an order of magnitude more damage when it crashes into the markets.
And keep in mind the Fed’s response is to give away billions. In return they are getting subprime mortgage securities that are worth a small fraction of the money they are giving away, and this is being done on taxpayer dollars. It’s a $200 billion dollar shot into the financials, and it’s coming from the Fed printing money. It’s purely inflationary.
Now couple all that with oil hitting $109 earlier today, and you begin to see the problem. After the inflation kills demand, the deflation will begin.
The problem with money for nothing is that the checks aren’t free…somebody always has to pay for it. Guess who’s picking up the tab for the bank bailout?
The Fed is aware now that cutting rates won’t do it. Bailouts aren’t going to solve the problem either, it’s just as inflationary as massive rate cuts. The Fed is running out of things it can try to do to buy time. And when that time is up…
Boom.
