Last night I wrote a piece where I stated my belief that we are now in a new phase of the crisis. The day to day pounding on our financial plumbing, the short term credit markets, is beginning to take a very dangerous psychological toll on the system. We are moving from fear to despair. Once despair and complete lack of faith kicks in, it really is game over. I said that it is time for the Fed to intervene directly in the Commercial Paper (CP) market. Here is a comment posted by one of our most astute readers and free-market thinkers last night.
Credit facilities everywhere are being cut. Covenants are being forcibly and EMOTIONALLY renegotiated. If you board a plane heading to NY right now you'll have at least a handful of cfos and treasurers in your company.
The commodities business is grinding to an ear-splitting, metallic halt. No one wants to trade anything: be it natural gas swaps to trains of aviation fuel on down to barges of soybeans. Producers are getting assaulted by the double entente of surging interest expenses (if they can get credit!) and stutka-diving prices. This on top of the fact many expanded what were only marginally profitable businesses during high prices- only to see unprecedented board drops.
Something must be done fast. Otherwise we're about to enter the ultimate house of pain.
Last night, I wrote that it is time for the Fed to throw the old playbook out, and do what I called "A Bobby Layne". Bobby Layne was a Hall of Fame quarterback in the 1950's. When the game was on the line, Layne was known to toss the playbook, draw his own play in the dirt while in the huddle, and lead his team to improbable victory. I am very happy to see this morning that Ben Bernanke, Hank Paulson and our friends across the pond in the U.K seem to be doing just that. Here is what has happened overnight and what is being seriously discussed.
- According to Bloomberg News The Fed is signaling that they are preparing measures with Treasury to "unfreeze markets where loans are not secured by assets". By this I believe they means the CP markets and potentially bank revolving credit facilities. Bill Gross of PIMCO said last night, "The Federal Reserve must act as a clearing house for banks. The must also take another bold step: outright purchase of commercial paper." Also the very highly respected former Fed Governor Larry Meyers said, "The Fed is not done yet. They are going to try to leapfrog ahead and do something even more dramatic." Currently what constrains the Fed is that it is not allowed to make unsecured loans. It is already providing emergency loans to commercial banks to purchase asset-backed commercial paper from money market mutual funds. Given the Treasury's new buying powers, the Fed is looking to do something in concert with Treasury to push the envelope again and get directly into the CP markets.
- The combination of the Fed increasing it's Term Auction Facility (TAF) to $900 billion and paying interest on deposits (new power gained from the Emergency Economic Recovery Act) is acting as a "stealth easing" according to John Ryding. The ability to attract deposits from banks hoarding excess cash and re-lend is flooding the banking system with liquidity. The Fed has effectively pushed the overnight lending rate down from 2% to 1.25%
- Bloomberg News reports that "The U.K. government may invest at least $79 billion in banks including Royal Bank of Scotland and Barclays to bolster capital depleted by mortgage-related losses, two people with knowledge of the situation said." The UK's biggest banks have up to $95 billion of debt maturing between now and March 2009. Confidence in the banks, like elsewhere is severely weakened. A direct infusion of capital by the government would bolster confidence and allow the banks some operating room.
If we go down, we are going to go down swinging. That inspires some hope on my part. Be lucky today.
