Yes it is, says Greg Michalowski from FXDD . I suggest you read what he has to say. I tend to agree overall with his ideas, but I am just angry that it had to come to this in the first place. Corporate greed and stupidity was the cause and these big ivnestments banks are beneficiaries of what amounts to corporate welfare. – all at the tax payers expense! But, it is true that a rescue plan is necessary to avert further and potentially far worse financial disasters that will surely come if nothing is done. It’s a tough issue to deal with. Anyways, here is the article. Ejoy!
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Is it time for a huge and meaningful US rescue package? Have the risks gotten too great for the current band aid policy to continue? The time seems right. Something has to be done to prevent further deterioration in the US financial sector.
Paul McCully, from PIMCO, was on CNBC arguing for a preemptive strike by the Treasury through the direct purchase of Mortgage Backed Securities directly from the banks. By doing this, the banks would be free of this ball and chain of the MBS securities and the risk would be transferred to the Treasury and the US taxpayer.
Another solution would be for the Treasury to inject capital directly into the banks – shoring up the capital base and freeing the blockage that prevents lending to take place. Smart lending is the engine of economic growth and certainly something the housing market needs to survive.
Where does all this money come from? It comes from US taxpayers who assume the risks of the actions by the central bank. However, as Mr McCully points out, sometimes a dollar spent now is better than spending $5 later on.
The financial system needs stability to function properly. The last week and a half have been anything but stable. In fact it has been pretty scary.
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Gold rose by the most on record in a single day.
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T-bill rates went nearly to 0%.
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The FDIC announced it is raising the premiums for insurance. HMMM. What happens if banks start failing and the FDIC is under capitalized?
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There was a outflow of money from money market funds for fear of the risks inherent in the Commercial Paper exposure. Commercial paper is an important source of funds for corporations. If there is no demand for this paper, working capital disappears for the corporation. At best the cost of funds increase and this is exactly what is not needed in this time where growth is slowing and inflation is a concern.
Having said that, we are seeing the financial landscape change. Investment Banks are realizing they need more capital behind them which comes from a deposit base - hence the merging of Merrill with Bank of America and the talks between Morgan Stanley and Wachovia. That is good. It is a start. It opens up funding to them which keeps them liquid and allows them to do what they do best (which should be investment banking that grows business, not only speculative trading).
We saw the Treasury come in and save AIG. The downside to a failure there would have been a disaster.
Banks have also raised capital but the supply of funds is dwindling. Investors are getting scared as each fire is put out after the fact. It is time fires are prevented, not just put out.
The problem is the ”pink elephant” is still in the room. That elephant is the massive amount of mortgage debt on banks books that has no place to go. No one can sell them. No one wants them. This is starting to create layer upon layer of problems (i.e. AIG and their CDS exposure). Currently, the only choice is to hold the instruments and hope that people make their mortgage payments.
This creates risk. If the economy worsens (which it will if something is not done to stabalize markets), the expectation is that those instruments will continue to suffer. This will lessen the values as more and more homeowners are foreclosed. MBS values decline. This leads to another round of bank weakness and the need for more capital.
At each step down, another financial institution or two will disappear and more get weaker (when a Lehman goes under, it weakens other financial firms who have exposure to them). This leads to more demand for capital.
In addtion another problem may found in the process. The exposure of AIG to Credit Default Swaps (CDSs) is a derivative instrument that highlighted the massive risk in some financial institutions. AIG can have a great insurance business, but be taken under by the misguided risk of the CDS portfolio. As a result, they aren’t as smart as they thought – as Wall Street thought. AIG did the equivalent of opening a casino and taking the winnings for the day, going to another casinos roulette wheel and betting red. A number of days they won, but eventually the casino wins. That is why Las Vegas survives and why their profits are more tied to the strength of weakness of the economy – not the luck of their clientele.
The point is the downward cycle has the potential to be never ending. Eventually it all falls apart and there is a run on banks. We don’t want to get to that point
The T-bill rate going to nearly 0% yesterday is a scary situation and indicates to me that things are getting closer and closer to that scenario. LIBOR rates soaring and banks keeping money, not lending money is symptomatic of some serious problems. We have reached a tipping point. I say, “UNCLE”. How about you?
I expect that the wheels are in motion for something to be done that will prevent - not just fix. The weekend is approaching and with the weekend comes time and closed markets. This is what is needed.
I would not be surprised if a massive rescue plan is announced this weekend. It should involve a direct injection of capital into banks. It should involve an assumption of the risks that will take the toxic mortgage paper off the balance sheets of the banks once and for all. It should involve increased regulation that will prevent this from ever happen again, and above all it should involve a price that is paid by financial institutions for their past transgressions – but over an extended time period. If US taxpayers are to bail out the banks and financial institutions, they need to benefit fairly for the rescue. Money paid back above and beyond the rescue amount, should be paid directly to the taxpayer (via a rebate) and not used for wasteful Congressional line items. A failure to do this will be a disgrace and a slap in the face to the US taxpayer.
Wall Street created this mess. They did not manage risk. They benefitted from oversized, fictitious profits and received handsome bonuses for their delusional thinking. Creating financial instruments that hedge risk (like CDS were thought to do) should hedge risk. NOT CREATE RISK via an explosion of speculative risk taking.
It is time for action, not reaction. Look for it this weekend.
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what some other traders have said about this article:
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I couldn’t agree more with Greg Michalowski’s blog on “Is It Time for the Huge US Rescue Package?” It seems the bigger the (Wall Street) fish, the safer they are from the repercussions or accountability. Ditto for the large banks and financial institutions. Hopefully the new administration will see to this, or least put some restrictions in place to help the taxpayer. I think the original intent was for the banking & financial industry to serve the people and not the other way around! Such transgressions truly do affect the global economy.
Posted by Dr. S. Bacso”
Source: This link over here
Related posts:
- Year-end money market yields edged up again, probably to the dismay of central bankers
- Emergency meeting over the weekend to discuss rescue of West LB
- FXDD Forex Weekly Roundup: Oh what a week!
- The US economic calendar will begin on Wednesday with the pending home sales report for September
- 3 Questions The Government Doesn’t Want You To Ask About the Financial Crisis
