Lots-o-chatter on this on the Buzz and Banter at Minyanville.com, where Todd Harrison hasn't minced words on the topic. "Conspiracy?" he writes. "Come on now, the only difference between intervention and manipulation is communication."
The bigger question I've had is if the discount rate cut was so critical, why did the banks have to issue a joint press release about $500 million "droplets," as Todd calls them -- and why didn't they rush to the window when rates were shaved? According to John Succo a.k.a to me as the "rocket scientist,", also writing on the 'Ville -- in response to a back-and-forth the two of us had off line: "Some banks did [access the window], but the big banks are still okay...so far.
"But this thing ain't stopping, the Fed is just delaying. IT has begun. Looking back at 1973: That was the last time there was a credit crunch. The government responded similarly. They thought they could control markets, so Nixon went off the gold standard and that created higher interest rates, which will happen again. Lower dollar=higher rates. We need a 70s type correction to wipe out bad debt. It will be painful but the only way. The government is too big. The response is to get bigger, but it only makes it worse."
He further notes that on one hand the market is being bid back up "while government officials try to reassure investors as to the soundness of the financial system."
On the other, he says, investors are paying prices for options on bank stocks and other financials "that indicate bankruptcy. We can't have both. This is not a 'wall of worry'. I have never seen option prices this high in big capitalization financial companies...Either the stock market in general is going to correct massively, or the buyers of this protection are really making a big mistake."
I am not really one of these people who believe in conspiracies, but that does not mean that the Working Group on Markets is not what is seriously mitigating things. Hey, they admit they do it. They certainly have the horsepower and brains to pull it off, with Paulson and so on, market traders par excellence.
The only trouble is, how many times can this work? I think it is rather clear that, now that mortgage derivatives have been scattered world wide, and are being written down to 10 cents on the dollar, some more anarchy must ensue. We may have sort of weathered the first real test, but at great cost, and likely many hidden losses out there. We are not out of the woods yet by any imagination. The bad derivatives are about $2trillion worth of subprime and Alt A (one level higher). 20% of these are in arrears. Then we have the trouble spreading to even good mortgage derivatives, as investors flee these regardless of quality. That has caused jumbo loans (exceeding 400k US) to become hard to get and at 9%! Good luck to the high end real estate market.
Obviously, mortgages are not all going to lose 90% of their value, or are they? Maybe, if we have a real depression, and that is quite possible given the scope of this credit crisis – way larger than the LTCM episode – maybe if we have a real depression most mortgage derivatives will lose 90% value. We are talking something in the range of $10 trillion worth of new mortgages in the last 5 years that are becoming a big weight around all the holders of the paper.
Crisis has spread everywhere
Now, we get into the issue that the credit crisis spread to other areas and hammered confidence. The Fed used the discount rate to encourage lenders to loosen up. They lowered the rate .5% to 5.75, and allowed 30 days, instead of overnight – plus the option to roll forward as needed. That should have helped the situation. However, not too many took the Fed up on the deal, so we had an orchestrated campaign, where Citi, Morgan, Wachovia and another borrowed $500 million apiece Wednesday from the Fed under those terms.
Then, this is supposed to encourage others to take advantage of the discount rate. The trouble is, banks and institutions are not. Why is that? Because they don't want to lend the credit to others in trouble, and then assume the risk. So, it does little good to lower the rate, and even have campaigns to take advantage of it, if lenders have lost confidence in the liquidity of the system, and that is a real problem.
So, unless central banks are willing to just underwrite the entire credit system, and cover all impending mortgage losses, (buyers of everything as last resort, like MBS – Fed) we will likely not see any confidence return to credit markets. This is the thing the ECB has been quite afraid of. So has the Fed. The trouble is, if the CBs do underwrite all the losses (monetize them) then the only healthy market left, sovereign debt like US treasuries, will collapse too. Then we are in total disaster, as the USD might just let go finally…and we now go to a combination of a liquidity crisis followed by a collapsing USD – that is if the Fed wanted to monetize all these trillions of losses. So that can't happen. People who think central banks will totally cover all these trillions of losses and hold up equity markets overestimate their power and willingness to do that.
The ONLY solution that has done anything so far, is to prevent a real equity sell off. That is another problem. We already have hedge funds and banks going under. New revelations of these instantly hit stocks. This is likely to continue
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