may be that the Fed will own a priceless(ironically) banking franchise here that will be priceable later. It may be able to recoup many times its investment if it can pull the banks out of jeopardy.

Ben Bernanke, the Ph.D, may be about to learn a profound lesson in stallion trading.

http://mauberly.blogspot.com/

From the London Times:

However, Chris Whalen, of the Wall Street consultancy Institutional Risk Analytics, said: “This is going to go all the way up the chain. There is a risk that all broker dealers are going to become an endangered species if the credit crisis is not sorted out. If they can’t fund themselves, they will have to shrink. All the other firms are in danger, too.”

He said that should the US Federal Reserve, the US Treasury and the Securities and Exchange Commission not devise a broad rescue plan to address the credit turmoil on Wall Street this weekend, “I would not be surprised to see an emergency bank holiday announced. That hasn’t happened since Roosevelt.” During the Depression, 75 years ago almost to the day, Franklin Roosevelt declared a four-day bank holiday, which stemmed a frantic run on banks. Mr Whalen added that should banks such as Lehman continue to be unable to sell the billions of dollars of mortgage-backed securities held, they were doomed. He said: “Broker dealers have to be able to get rid of assets. If they are illiquid, they die.”

Talk about burying the lede.

The Great Helmsman will be meeting with the Plunge Protection Team President's Working Group on Financial Markets on Monday.

By JEANNINE AVERSA
Associated Press

Mar 16th, 2008 | WASHINGTON -- Treasury Secretary Henry Paulson on Sunday defended the Federal Reserve's decision to help rescue Bear Stearns Cos., the teetering Wall Street investment bank. He sidestepped questions about whether other firms are on shaky ground and the possibility of additional interventions of this kind.

At the same time, Paulson sought to send a calming message that the Bush administration is on top of the turbulent situation. "The government is prepared to do what it takes" to ease turmoil in the financial system and minimize any damage to the national economy, Paulson said during a series of broadcast interviews. The Fed's intervention "was not a difficult decision. It was the right decision."

The Fed, using a Depression-era procedure, raced to Bear Stearns' aid Friday along with JPMorgan Chase & Co. Bear Stearns had made a fortune in mortgage-backed securities but faced a possible collapse after those investments soured. Wall Street nose-dived as fears spread about whether other big firms were in jeopardy.

"When you go through a period like this," Paulson said, "policymakers need to balance various consequences."

Some critics contend that the Fed's move was akin to a government bailout — something the Bush administration has repeatedly said it is against.

"Well, every situation is different. We have to respond to the circumstances we're facing today," Paulson said. "And my concern is to minimize the impact on the broader economy as we work our way through this situation, and again, the stability of our financial situation."

Asked whether other financial companies may be in a situation similar to Bear Stearns', Paulson did not directly answer. He did seek to strike a confident tone.

"Well, our financial institutions, our banks and investments banks are very strong," he said. "And I'm convinced that they're going to come out of this situation very strong."

Paulson would not discuss what would have happened if the government didn't extend a financial lifeline to Bear Stearns. "I'm not going to speculate about what ifs," he said.

more

Well it must be bad if the administration has no "what ifs" left! ;)

They'll be avoiding the D word, I expect. We are going to be hearing a lot about our entering a period of financial disintermediation.

By Margareta Pagano, Business Editor
Sunday, 16 March 2008
The Independent

Wall Street is bracing itself for another week of roller-coaster trading after more than $300bn (£150bn) was wiped off the US equity markets on Friday following the emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.

One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed's emergency funding procedure was first used in the Depression and has rarely been used since.

A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow."

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: "We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it's a self-feeding disaster." Mr Taylor, who had been relatively optimistic, has turned bearish: "It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on."

Mr Taylor added that he expects a sharp downturn in the real UK economy as the public and companies stop borrowing. "We have never seen anything like this before. This is new territory for us. Liquidity is being pumped into the system but the banks are not taking any notice. This is all about confidence. The more the central banks do, the more the banks seem to ignore what's going on."

Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: "There will be more banks and hedge funds heading for collapse."

One of the problems facing the markets is that, despite the Fed's move last week to feed them another $200bn, the banks are still not lending to each other.

"This crisis is one of faith. We are going to see even more problems in the hedge funds as they face margin calls," said Mark O'Sullivan, director of dealing at Currencies Direct in London. "What we are waiting for now is for the Fed to cut interest rates again this week. But that's already been discounted by the market and is unlikely to help restore confidence."

Mr O'Sullivan added that the dollar's free-fall is set to continue and may need cuts in European interest rates to trim the euro's recent strength against the dollar. "But the ECB doesn't like cutting rates," he said.

On Europe, Mr Taylor said that while the German economy remains strong, others such as Italy's and Spain's are weakening. "You could see a scenario where the eurozone breaks up if economies continue to be so worried about inflation."

European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.

...

Since most money market funds hold a majority of their assets in corporate paper, it seems that this will be a source of major disappearance of capital. The government will be called on to make good on a lot of this as well. Agree?

Pitchfork salesmen. Expand into guillotines later.

Numerian,

My view is that Congress should just start loaning direct to home buyers. Some standard rates and deals, something like after WWII.

If mortgage backed securities was the creation of an alternative money supply, then it needs to be regulated. I get that. (Vaguely)

But I think that earlier attack on the financial trouble is better than later, and that Congress needs to do something dramatic to step in and restore order in mortgate industry. Much more dramatic than so far.

If housing prices spriral down, down, down, then consumer spending will be crippled for a generation.

This sprial stuff tends to overshoot.

To hell with fairness and bailing out the unworthy. This is about saving ourselves.

Get the hell out of Iraq, and spend the money on Green infrastructure to prime the pump and to establish a more sustainable pattern of economic activity.

but we need to think outside the box

some dramatic set of actions that will breed confidence that, even though things will be bad, that a program is being put in place to put a floor beneath which things will not fall

I am vaguely aware of Fannie Mae and Freddie Mac; I do not think that those bureaucracies can be nimble to any new mission. I do not think we should plan around them.

Maybe a new national bank that would buy distressed institutions with conditions that strip away much of the lucre from the financial elite as a condition of preventing a total wipeout. This national bank would also have to start lending.

The whole gambit would test the creditworthiness of the US, but the Arabs and Chinese are already in for a dime, and would probably stay in for a dollar.

Politically, "fixing" the old system (and bailing out the marauders) is a weak case, in my view.

We need something new, bold and practical.

The practical part will be the toughest.

Much I don't understand about this stuff, but here's just a question to maybe help me learn...

Why is the idea of a bank holiday related to Bear Sternes bailout Friday, because it might be necessary to bail out another firm Monday? But wasn't Friday's bailout successful? Looks ok to me (not in industry though).

And anyway, this is not a matter of people lining up to withdraw funds. Even if all those with trading assets at company xxx decide to transfer their assets, those transfers would simply take place over the next few days settlement periods, right? Plenty of time to plan a bailout, if necessary, as same assets will exist at receiving firms, who will thereby acquire more capital to work with.

What am I not seeing? Is it all just a confidence game, cooling off?

Bank holiday in US would not work anyway for international transfers and the USD and USD assets are traded worldwide these days. It would just mean that asset prices, exchange rates etc would be set in other marketplaces. Or so it seems.

Clarification appreciated,

There goes the rest of us

There's something truly scary about the current financial crisis and the potential risks to the global economy when the International Monetary Fund warns that governments need to "think the unthinkable."

This is a sign that we are in uncharted waters and even the top experts don't know what will happen next. The IMF is saying that despite recent massive interventions in financial markets by the U.S. Federal Reserve, the Bank of Canada and the Bank of England, things could get much worse.

Indeed, we could be headed for the worst financial crisis since the 1929 stock market crash and the Great Depression of the 1930s.
More

By LIZ RAPPAPORT and JUSTIN LAHART
March 15, 2008; Page A1
The Wall Street Journal

The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts.

The unfolding financial crisis -- one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks -- appears to be broadening further. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer.

Recent days' cascade of bad news, culminating in yesterday's bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum -- touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems.

Global investors are pulling money from the U.S., steepening the decline of the U.S. dollar and sending it below 100 yen for the first time in a dozen years. Against a trade-weighted basket of major currencies, the dollar has fallen 14.3% over the past year, according to the Federal Reserve. Yesterday it hit another record low against the euro, falling 2.1% this week to close at 1.567 dollars per euro.

Lenders and investors are pushing up the interest rates they demand from financial institutions seen as solid just a few months ago, or demanding that they sell assets and come up with cash. Banks and Wall Street firms are so wary about each other that they're pulling back. Financial markets, anticipating that the Fed will cut rates sharply on Tuesday to try to limit the depth of a possible recession, are questioning the central bank's commitment or ability to keep inflation from accelerating.

There are other symptoms of declining confidence. Gold, the ultimate inflation hedge, is flirting with $1,000 an ounce. Standard & Poor's Ratings Services, a unit of McGraw-Hill Cos., predicted Thursday that large financial institutions still need to write down $135 billion in subprime-related securities, on top of $150 billion in previous write-downs. Ordinary Americans are worried: Only 20% think the country is generally headed in the right direction, nearly as low as at any time in the Bush presidency, according to the latest Wall Street Journal/NBC News poll.

"Clearly, the whole world is focused on the financial crisis and the U.S. is really the epicenter of the tension," says Carlos Asilis, chief investment officer at Glovista Investments, an advisory firm based in New Jersey. "As a result, we're seeing capital flow out of the U.S."

That is a troubling prospect for a savings-short, debt-heavy economy that relies on $2 billion a day from abroad to finance investment. It is raising the specter of the long-feared crash in the dollar that could further rattle financial markets and boost U.S. interest rates. ...

when we're moving from recession to depression language in the space of roughly two months, following the stock market drop in January. Though, really, this may be a lot more practical and pragmatic than some of us hoped. From wikipedia, a former Fed chairman detailed the causes of the Great Depression. I felt like I was reading a current economic forecast at points.

from: http://en.wikipedia.org/wiki/Great_Depression

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

is that I'm happy to have a well paying job, inflation adjusted, and not tied to the economy at large. If economic upset of this magnitude is going to happen at some point, I'm just as happy for it to happen while I'm 26, just gaining traction income wise, with few assets to lose and plenty of time to acquire more as things right themselves over time.