October 06, 2008

Special thread to talk about the Wall Street Madness



OK, let's kick it off.

Now that was an interesting day, eh?

72 comments:

keith said...

A good day to be on the beach

Look at the chart though - the conspiracy crowd is going to have a cow with the buying that started at EXACTLY 3pm

So, what does tomorrow hold? And October?

Nothing good happened to fix this yet. I expect rate cuts across the globe this week, and some new massive bailouts and nationalizations.

Not a market for the weak at heart. And I agree with Cramer - if you don't have 5 years of savings socked away you have no business in this market. 5 may be high, but this market is a casino, not a market. Amateurs get slaughtered.

Anonymous said...

There is more to come, but there will be some money made also. I am waiting to jump in and I will when I sense the bottom. Who know how long that will be! Cash on hand waiting to pull the trigger.

keith said...

Take a look at the 1929 chart and ask yourself if you want to be a hero

http://www.lowrisk.com/29crash.htm

Anonymous said...

The printing of dollars is keeping America from falling into the abyss.
How much longer can we hold before the dollar dies? How much longer before our major creditors like China begin to say we want out and will give away our dollars for a dime. How much longer?

burn baby burn said...

Is anyone actually buying?
Once the P/Es get recalculated for the brutal 4th quarter - 9800 dow will seem like a pipe dream.

Anonymous said...

Keith,

That graph on the 1920 drop is a 5 wave based on Elliot theory. Right now we are at a third wave known as the C wave, the most painful one. This will probably take us to 8000 on the DOW. Then when we reach wave 5 we will be in a great depression, and that will take the DOW to probably 5000. The 5th wave will probably be by the beginning of next year.

burn baby burn said...

Ooops, just watched the d*ckhead Cramer video, sorry I pointed out the obvious.

keith said...

I sense a relief rally tomorrow, maybe longer, then another leg down

There are companies out there, great great companies, lots of cash, great balance sheets, going for stupid P/E's

This panic is now pricing in a depression. If a depression comes, the prices are justified and can go lower

If depression is avoided, the valuations will be seen in retrospect as a joke

What'll be really interesting is Cramer's call today after history is written

bitterspookedrenter said...

Is this it? Is this the Great Depression II my parents warned me about?

I was raised by Depression-era parents who impressed on me as long as I can remember about living "right" so as not to get buried in the rubble of the next economic debacle. Their tactics were purely fear-driven and it worked.

That doesn't put my mind at ease about the pain and social unrest that could occur.

So is this it? The horrible meltdown my parents warned me about?

Anonymous said...

keith said...

I sense a relief rally tomorrow, maybe longer, then another leg down

There are companies out there, great great companies, lots of cash, great balance sheets, going for stupid P/E's

This panic is now pricing in a depression. If a depression comes, the prices are justified and can go lower

If depression is avoided, the valuations will be seen in retrospect as a joke

What'll be really interesting is Cramer's call today after history is written

------------
Keith,

That is all going to depend how the other world markets perform. If the other world markets lose another 4 or 5 percent, then I have to disagree with you on this one. We might actually be facing a 1000 point drop tomorrow as Panic really starts to spread!

Also you can bet that there will be other bank failures right around the corner that will only add to more panic!

keith said...

I think the big problem won't be the bank failures, or the printing presses, or the layoffs, or the inability to get mortgage and credit, or the collapsed housing prices

No, the real problem will be a change of attitude by consumers. They're freaked out and they're going into their caves for a bit. Maybe a year, maybe two or three. But the days of credit cards and HELOCs and living way beyond your means because MTV Cribs said you should are over.

For a bit.

And when you have an economy like the US based on consumer spending, and you have countries like China who see 25% of their GDP tied to exports, when their best customer stops spending, then there's nothing that'll fix it quick.

sandman said...

Hard to call tomorrow.

But over the next 2 weeks - we're headed down.

There will be a Giant Sucking Sound when the 401Ks move. I suppose Friday and today's could have been our congressmen and their staffs and family's moving their money... wait til J6P and JLB move in unison.

Funny thing is... they're all going Treasuries.

Also agree about some of it will be how Asia and Europe plays out.

keith said...

Well, so much for that rally

Bank of America (i.e. Countrywide's new daddy) just halved their dividend, announced a 10% dilution of their shareholders, and missed guidance.

Crashing afterhours

http://tinyurl.com/4jsl7a

Meanwhile Mozilo sits at home enjoying a nice martini, counting his money

nfn.nln said...

There are companies out there, great great companies, lots of cash, great balance sheets, going for stupid P/E's

Check out "Bottom Feeding Billionaires":

http://tinyurl.com/47g4tt

Looks like Goldman, GE, NY Times... are being bought up by those in the know. What else are possible picks?

Lost Cause said...

This is the sound of republicans cleaning out the country before they leave. Yet American exceptionalism believes that there could never be a tyrant here, in spite of the fact that we see it so often in other countries. This is what they do before they leave, just like Carlos Salinas did before he left Mexico. Everyone else is running for the exits.

rin tin tin said...

"Is anyone actually buying?"

Is it live or is it Memorex?

Total maniplation of trading platform?

Bogus market data.

keith said...

A good value investor would be buying hand over fist right now. The only reason not to is...

if it really is different this time

Anonymous said...

Blogger keith said...

I think the big problem won't be the bank failures, or the printing presses, or the layoffs, or the inability to get mortgage and credit, or the collapsed housing prices

No, the real problem will be a change of attitude by consumers. They're freaked out and they're going into their caves for a bit. Maybe a year, maybe two or three. But the days of credit cards and HELOCs and living way beyond your means because MTV Cribs said you should are over.

For a bit.

And when you have an economy like the US based on consumer spending, and you have countries like China who see 25% of their GDP tied to exports, when their best customer stops spending, then there's nothing that'll fix it quick.
-------------
Keith,

Shortly you've heard of Credit Default Swaps. It is a 55 Trillion Dollar market that exploded within the last 7 years.

It is the main cause that really allow the housing bubble to take shape. Banks were working on a 10 to 1 ratio(Assets/Reserves), which is the leverage ratio that good banks should have.

Their main problem was how do we release our reserves to allow more investment from our reserves. The formula they came out with was CDS.

This allow them to insure trillions upon trillions of mortgages and mortgage securities to insurance companies that were unregulated. That means they didn't have to have show any prove of capital showing that if these securities went bad that they could cover the policy.

On top of that the Banks could leverage the risk to 30/1 , 40/1 on some of the most riskiest assets(mortgages). The CDS allow them to free up their reserves.

The problem also is that many companies not just insurance companies, like GE, Boeing, Banks, etc were also insurance companies that insured these securities. They in turn res inured those securities, like one big pyramid scheme.

As this pyramid falls, you have the panic of 55 Trillion dollars of this secure debt about to go bust! This is the monster that is currently staring one in the eye and this is the monster the FED is up against!

It seems like every damn good company out there got infected with the CDS virus!

Tonto said...

I see a global coordinated rate cut coming this week.

Bill Gross already wrote one of his winey letters today pan handling for a 1% cut.

I see the cut happening, and a modest rally to perhaps DOW 10,500
Then within 3-5 days after the cut the market will continue it’s decent to retest today’s intraday low.

keith said...

I have two 'watching' portfolios right now - armageddon and after armageddon

after armageddon (stocks I want to own but don't) was down 4.2% today

armageddon (stocks to buy if the world is truly ending) was only up 1%

Looks like good weather to stay on the beach eating popcorn I'd say

Anonymous said...

Here in Silicon Valley, the retail stores seem empty, commercial real estate has tanked, traffic is lighter, No lines for coffee and even the paroled from jail illegal alien mexican felon invaders when not driving drunk without a license and insurance and killing or maiming legal tax payers seem to be returning under the rock they crawled out from under which is breaking everyones heart especially the contractors who used their cheap uninsured labor.

So, in spite of serious, systemic financial crisis which is sure to slide Right Bye a recession into at least a mini Bushco-Cheneyburton caused New Depression there are some things looking Up...

Oh yes, WaMu took the WooHoo banners down last Friday as well and Wachovia is keeping sign companies on 24 hour standby so they can get their new name up on the branches depending on who is the dummer bidder for that smoking ruin.

Only $700 Billion? Such a deal.

keith said...

You know I haven't seen Lawrence Yun yapping away about how home prices would be up in 2008, or how we've hit bottom (again) or how things are rosy

Anyone else amazed that he keeps his job? You'd think that an organization wouldn't want the laughingstock of the nation as its public face

You know, like America has right now too

Peter said...

How can this crash be "pricing in a depression"???

The markets are only down ~30% from the peak. In an AVERAGE recession, the S&P drops 27%

So we're just in a slightly worse than average recession at this point according to the markets.

If this is really depression territory, then we ought to see a real crash/slide. i.e. at least 50% down for a severe recession, much worse for a depression

Anonymous said...

Existing-Home Sales to Trend Up in 2008

WASHINGTON, December 09, 2007

Existing-home sales are projected to trend up in 2008, with pending home sales showing a slight near-term rise, according to the latest forecast by the National Association of Realtors®.

“Home price growth in the vast affordable midsection of America will help raise the national median existing-home price slightly in 2008. I then expect price appreciation to return to more normal patterns in 2009, perhaps rising one or two percentage points above the rate of inflation,” Yun said.

Malcolm said...

Two Thoughts....

1. Now that the music has stopped, I think it's too late if you're not ready. If you thought it through and picked your positions, you're now left riding it out to see how good your choices were.

2. With all of the action near the closing bell, it seems (to me), that we have a bunch of people cashing out each day as to not have to hold anything overnight.

keith said...

The russian and chinese markets sure are pricing in a depression

Russia down 64%, China down 60%+

Anonymous said...

Keith,

Seems like your getting a bit cold feet, maybe you got some investments that you are fearing, but the truth is this is going to get much worst!

You called it with housing panic yet this down turn hasn't even begone to factor in a Great Depression!

The statement you made about it factoring the great depression is not even close to whats about to happen!

keith said...

Another day another trillion being printed up by the Fed

These numbers are so big you just yawn at them now, don't you?

http://news.yahoo.com/s/ap/fed_credit_crisis

WASHINGTON - The Federal Reserve will provide as much as $900 billion in cash loans to squeezed banks in an urgent effort Monday to break through a dangerous credit clog that threatens the economy and has unhinged financial markets around the globe.

The Fed's action is aimed at spurring spooked financial institutions, which are hoarding cash, to lend not only to each other but also to individuals and businesses.

keith said...

When I see all the sheeple start thinking the same way, led by the ignorant MSM, I head the other way

Now everyone is panicking. Everyone. The markets are irrational, and you get Cramer telling people to sell everything.

This feels like a classic, CLASSIC, bottom.

But yet, I stay on the sidelines. Because it truly could be different this time.

This bubble was the biggest bubble in human history. Far and away. Nothing even close.

So the resulting crash should be on the same level.

That said, the government can jump in, change the rules (Iceland just banned selling Financial stocks for instance), fire up the printing presses, and put off the day of reckoning.

So, in the end, this market is just too risky either way. If you go long you could get crushed. If you go short you could get crushed. If you're on the beach with popcorn, you get to enjoy the popcorn.

Anonymous said...

Keith,

Don't Panic! You called it many years ago!

sandman said...

malcolm - agree on your points.

Les jeux sont faites.... as the those crazy French say

Anonymous said...

AAPL up 10% or some such nonsense in the last hour of trading.

PPT to the rescue!

Out at the peak said...

I took a big hit on all my holdings. They are high dividend paying stocks (energy and communications).

I did a little day trading and recovered just 12% of today's losses. Not a good day overall.

Keith, you were right about going all to cash. I almost did it last week; kicking myself now.

keith said...

Anyone else get the sense another shoe is going to drop this week?

A really big shoe?

sandman said...

Hey Keith... as your buddy Schiff says... "its a pendulum. the pendulum doesn't swing one way and then come back and stop at the middle..."

Also, in the early 30ies the sheeple knew too. and we know how that turned out.

keith said...

OUT AT THE PEAK - DAMMIT! OF ANYONE YOU SHOULD HAVE BEEN OUT AT THE PEAK!!!

Those knives, they make you just want to reach out and grab 'em, don't they?

Anonymous said...

This is a "wack the mole" market! Only problem is you gotta stick the gun down the hole to get a mole!

keith said...

In regards to home prices I agree on the pendulum analogy, but with stocks, I didn't see them as overvalued as homes

I think it's a rush to cash and liquidity by desperate over-leveraged sellers which is wrongly taking down fair market price for so many of these stocks.

But life isn't fair. Seeing russia trade at a P/E of 4 is bizarre. Seeing ConocoPhillips lose 40% in a few weeks is insane. Seeing AAPL get halved is unreal. Seeing GM trade down to zero - well, hell, that one makes sense.

big-J said...

Keith, I miss you!

Anyway, where is DOPES? I haven't seen him around lately?

Wonder what the issue is! Hope he didn't commit suicide or anything...

bitterrenter said...

Do you think Pres. Obama could be an FDR Redux?

Will we see 90% top tax rates again? Can we confiscate the wealth of the top 1%?

Any chance of building those work camps for republicans?

Anonymous said...

"keith said...
You know I haven't seen Lawrence Yun yapping away about how home prices would be up in 2008, or how we've hit bottom (again) or how things are rosy

Anyone else amazed that he keeps his job? You'd think that an organization wouldn't want the laughingstock of the nation as its public face."

What can then be said about the Bushco-Cheneyburton laughingstock of The World Act?

sandman said...

Nice one on GM... that was funny.

keith said...

I think Obama raises taxes on $250k+ like he said he would. And I think he runs $2 trillion plus deficits for a few years - revenues are going to dry up as spending is increased on infrastructure as a jobs program.

It's gonna be brutal. Get those printing presses going.

George Bush wrecked America.

keith said...

It's not just us anymore right - tell me that in America everyone, and I mean EVERYONE - is talking about the housing crash and financial meltdown

I mean like the waitress at Denny's. I mean like your hairdresser. I mean like kids in high school.

Right?

And tell me the housing porn shows are showing up less and less on the schedule.

And tell me there are a lot fewer ads for cash-out refi's and credit cards on TV

Right?

keith said...

OK that's it for tonight. Get some predictions in folks. What's the rest of the week hold?

sandman said...

Yes.. but, the same was true in the early 30ies.

I'd love to be wrong on this one. I mean that. If I am, I'll gladly be mocked (because it's gonna suck for all of us).

But I really don't think it matters that everyone "knows".

The fundamentals matter. People are broke. They won't get credit. They are not going to buy anything. What little cash they can scrap together they will hold close to their heart. They will avoid the market like the plague. 401Ks is any still exist will be in cash investments. Unemployment will be rampant - it will affect all sectors including healthcare.

Again, I wish I were wrong.

slycapital.com said...

Keith stocks are still radically over priced.
Your beloved AAPL has a PE ratio of 19 AFTER crashing 50% since August.
BAC is still sitting on a 19 PE.
No rational investor buys at these prices without huge expectations of a large growth in share value. Its the same reasoning for paying an excessive mortgage.

jim said...

Dow up tomorrow.
Close below 8k by end of ocober.

slycapital.com said...

By the way, I call BS on 30% of your readers having five years living expenses in cash.
That survey reminds me of the question where everyone's credit was 800 plus!

Anonymous said...

Keith,

I understand despising bush,
but please, please don't let
your guard down on obama.

His involvement with F&F as well as acorn, and backing the wall street bailout bill, as well as those which heavily fund him should
make anyone extremely suspect of him (as well as mr dereg. mccain).

Afterthought said...

By far the best blog on the internet; style and substance.

i've had it said...

The market was so manipulated today it wasn't even funny!

The big guns came in when the Dow hit exactly 800 on the downside. Then they bought it all the way up to exactly 10,000.04 at the close. I was watching this on TV and i couldn't believe the manipulation I was experiencing.

At five minutes to the close the Dow was hovering just below 10K; it was going like 9996, 9998, 9996, 9999, 9996, 9997, 9996 etc. etc. and then at EXACTLY 3:59:59pm the Dow hit 10,000.04 and the bell rang.

It was only after hours that the market went down to 9955. Clearly, the big guns said to themselves that a close of exactly 10,000.04 would raise some eyebrows and then bid it down.

What assholes.

This market will continue to go down, down, down, down, down!

All in cash. Got my popcorn.

Anonymous said...

Sure I have 5 years living expenses socked away - that is, if I want to live in an abandoned shack and eat ramen. Realistically, maybe about 6 months.

Anonymous said...

Doesn't that guy in the cliché trader-under-stress picture looks like a young Ralph Nader?

Anonymous said...

See this chart here?

http://tinyurl.com/4nm9yu

Call me when it hits right where the insanity begun around Mar 2003.

I'll jump in the market right then. Lots of forces fighting a real capitulation right now, from PPT to hedge funds. Not the time yet.

Anonymous said...

I can't never understand why anyone would buy AAPL knowing that its future depends on the well-being of a single individual, Steve Jobs. A person who had cancer already. Stupid is, stupid does.

i've had it said...

One of my predications is already coming true. In another thread I said that the govt. would forgive any amounts borrowers owe on their houses that they can't pay back (that is, the difference between what the purchase price and what the house is now worth).

Today, Bank of America announced that it would re-value the loans of 400,000 borrowers, write new mortgages for the new lower appraised value, and forgive the amount of the difference between the new value and the original loan amount.

All of this has been done with the govt's blessing.

So, now what's going to happen is that we will buy these new revalued mortgages from BoA and give BOA the amount that was forgiven. BoA will get the revenue stream from the revised mortgage and thus will be paid back in full. Assuming homes are worth half of what they were purchased at, then half the moeny will come from the borrower and half from the govt.

And to add injury to insult, the borrower will be able to keep any gains they make from appreciation of the house.

I know that people and the govt say that the U.S. (we the people) will get the gains, but that is just utter bullshit.

Nick is right: homedebters are going to make out like bandits. We HPers are going to get screwed.

The people with integrity...HPers (well, most of us)...will be left holding the bag.

Well, at least we'll still have our integrity...for whatever that's worth.

BMW Driving Sex Machine said...

Obama's top contributors (companies PACs, employees, etc..) for this presidential campaign:

Goldman Sachs $739,521
University of California $697,506
Harvard University $501,489
Citigroup Inc $492,548
Google Inc $487,355
JPMorgan Chase & Co $475,112
National Amusements Inc $432,169
Microsoft Corp $429,656
UBS AG $419,550
Lehman Brothers $391,774
Wilmerhale Llp $383,024
Time Warner $375,063
Sidley Austin LLP $370,916
Skadden, Arps et al $360,409
Stanford University $341,399
Morgan Stanley $341,380
Latham & Watkins $328,879
Jones Day $309,960
University of Chicago $294,237
General Electric $290,584

kilgore said...

The next 3 months include:

-Fed delaying the open market for derivatives and instead guaranteeing all derivatives products for major banks, fearing transparency would be "unwise?

-States demanding (and receiving) 10s of trillions of dollars in emergency funding (though only the states who are smart enough to demand it BEFORE THE ELECTION)

-The universal realization that we're all fucked and that gold is the only protection any of us have

-Spectacular buying opportunity with the S&P around 750

Anonymous said...

AAAAHHHHHHAAAAAAA,

A must read about lehman ceo

http://www.businessandmedia.org/articles/2008/20081006150152.aspx

Reality said...

Bitterrenter,

"Do you think Pres. Obama could be an FDR Redux?

Will we see 90% top tax rates again? Can we confiscate the wealth of the top 1%?

Any chance of building those work camps for republicans?"

FDR's work camps were for Democrats only; Democratic Party membership was a prerequisite for the make-work jobs. That's part of the reason why the Great Depression lasted till 1946.

BuyPutsGuy said...

Those watching intraday markets closely for 1 year will know that the Oct 6 low was a trap for shorts. Who cares if it's PPT manipulation or just funds/traders, just learn what they do and trade it to win!

After 350pt drop I bought calls every 10c (about 75 DJIA pts) down on the call contract. After the 500pt reversal Fri, the market couldn't end down 800. Not possible to have -1300 in 2 days. They won't allow it. Sold calls all the way back up to 10000. Closed all intraday trades. Very unsafe to hold overnight.

I've said it again and again, the market WILL go down (for years), but they will keep it from crashing (like 25% in 1 day). Rallies will be engineered. Don't fight it, make money off it!

Now, I could be wrong and we might see a huge 1 day crash, but I seriously doubt it and am betting my cash to suit.

Call up some charts of, say 1 year day chart on DJIA with bollingers and 50 + 200 DMA. Note how today was at about the biggest stretch away from the 50dma so far in 1 year. Note also the insane VIX. Not also how far outside the lower bollinger we were. Since we're assuming no huge crash, and we're assuming Helicopter Ben is still making his drops, the rubber-band market can't stay that far away from the norms for long. And don't forget options expiration next week. They will start getting this pig to rally.

It's been a long while since we touched the top bollinger, and weeks since hitting the 50dma. We should recover to those levels a bit.

One problem though, the idiots banned shorting financials so we may not get insane short-covering rallies. That's the downside to banning shorts. DO NOT BLAME THE SHORTS, THEY ARE REQUIRED FOR LIQUID MARKETS! So maybe slowish plodding back up to 50dma?

Tuesday might be straight up, BoA notwithstanding, or might be a low retest but by Thu/Fri we are higher than 10300. If I'm wrong and we tank more, then watch for massive rally engineering next week for options expiration.

Last bit of advice, careful buying long-dated put options here, as the volatility is so high that they are really expensive and it may be hard to recover the time value.

And, as always, buy long-dated puts on all 500+ rallies.

Anonymous said...

Lehman Brothers CEO knocked out cold

http://tinyurl.com/4svjta

i've had it said...

Did some interesting research on the 1929 market decline.

When the market crashed in 1929 it took almost three years for it to reach the bottom. The high on Sept 3 1929 was 381. When it hit bottom on July 7, 1932 it was 41.

A 90% decline.

So far we've gone through a 30% decline from the high in October 2007 of around 14,200 to today at 10,000.

If we were to do a repeat of the Great Depression market collapse the Dow would need to go to 1,400.

An interesting fact:

We are now at about 11.5 months after the October 2007 high and have a 30% decline. If you look at where the Dow was 11.5 months after the Sept 1929 high of 381, it was at around 225 in August 1930, a 40% decline.

I'm wondering if things really are as bad out there today as they were back then. Boy, it sure feels like it!

Miss Goldbug said...

Burn baby burn said:"Is anyone actually buying?
Once the P/Es get recalculated for the brutal 4th quarter - 9800 dow will seem like a pipe dream."


Exactly my thought as well. Why would anyone buy? No future profits. No reason to buy.

Anonymous said...

So is this it? The horrible meltdown my parents warned me about?



It's coming, you havent seen anything yet.

knifecatcher said...

HPers - Fuld was in the House today stating that it was impossible to see this tsunami. I think El Keith should send the thief a copy of the old HP logs.
These are amazing buys, but
go slow:
COP hit $59+ today.
EP $9+
INTC $16+
Any bank that you think will survive and hits it's July 15th low.
KBR - (Cramer)
GE $19
C-P...risky but sweet passive income.
Find your own dammit.

Anonymous said...

A minor setback due to some poor lending by a couple of banks.

Big deal.

Housing prices are STILL high.

People are STILL shopping on credit. I bought a new iPhone on my American Express yesterday.

Jobs data still solid, HP and Microsoft are posting record profits.

Some crash! DOPES!!!

DR. DARPA said...

Any projected attempt to cash in these credit default swaps will be meet with legions of security lawyers claiming fraud and force majure. Rather than pay any SWAP the issuing side will render these swaps non-negotiable.

The SEC will declare these unregulated swaps illegal "blue sky" insurance contracts and deny them standing in court before these will be a real issue impacting the US economy.

The major banks will continue to act in the utmost bad faith and refuse to trade loans and paper.

If the foregoing does not work, we will invoke the ultimate global economic stimulus package...world war...

My advice? Buy uranium, lead, steel making and military related stocks, and read more economic history texts for additional invetment ideas.

Gold will be soon be displaced by fissionable Uranium as the next muniment for negotiable value.

Anonymous said...

keith said...

It's not just us anymore right - tell me that in America everyone, and I mean EVERYONE - is talking about the housing crash and financial meltdown

I mean like the waitress at Denny's. I mean like your hairdresser. I mean like kids in high school.

Right?

And tell me the housing porn shows are showing up less and less on the schedule.

And tell me there are a lot fewer ads for cash-out refi's and credit cards on TV

Right?

Wrong. Everyone I know wants to talk about everything BUT Wall Street. It is depressing. Let's think happy thoughts.

JaneZ

Anonymous said...

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Fed weighs radical financial fix

By EDMUND L. ANDREWS and MICHAEL M. GRYNBAUM
The New York Times

Published: Monday, October 6, 2008 at 6:01 a.m.
Last Modified: Tuesday, October 7, 2008 at 12:56 a.m.
WASHINGTON -

— As pressure built in the credit markets and stocks spiraled lower around the world on Monday, the Federal Reserve was considering a radical new plan to jump-start the engine of the financial system.

Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses.

While the move would put more taxpayer dollars at risk, it underscores the growing sense of urgency felt by policymakers in a climate where lending has virtually dried up.

The plan was being formulated amid cascading losses in global stock markets, as the banking crisis spread across Europe and investors feared dire consequences for the world economy. The Dow Jones industrial average fell as much as 800 points before a late recovery, finishing down 369.88, below 10,000 points for the first time since 2004.

Even before bankers on Wall Street reached their desks, European stocks were plunging. The Russian stock market dropped 19.1 percent, the biggest decline since the fall of the Soviet Union. Major indexes in London and Frankfurt lost more than 7 percent; stocks in Paris fell by 9 percent. Stocks in Latin America and other emerging economies took their worst collective tumble in a decade.

Volatility reached the highest level in two decades, and oil prices fell below $90 for the first time since February.

"There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread," said Ed Yardeni, an investment strategist. "It's gone truly global."

Investors are worried about what the evaporation of credit will do to an already-weakened global economy. In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in five years. The $6 decline in oil prices, which settled at $87.81 a barrel, stemmed in part from fears that demand will slacken in the face of a deteriorating economy.

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, short-term IOUs issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

A healthy world economy relies on the easy flow of such short-term loans among banks, businesses and consumers, a stream that has been choked as banks become more fearful of giving out cash.

Those fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week. The cost of borrowing from banks and corporations remained high on Monday, increased in part by a series of high-profile bank bailouts in Europe, where governments scrambled to save several major lenders from collapse.

The U.S. government appears to be pressing ahead with other radical efforts to shore up the financial system, even wading into corners of the markets where it has rarely interfered. Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.

"The Federal Reserve really would become the buyer of last resort, trying to jump-start the commercial paper market by taking on credit risk," said Vincent Reinhart, a former top Fed official who worked under two chairmen, Alan Greenspan and Ben S. Bernanke.

The Federal Reserve has already stretched its resources to the limit by providing hundreds of billions of dollars in short-term loans to banks, Wall Street firms and money market funds.

On Monday, the Fed announced that it would once again redouble one of its key emergency lending programs, increasing the size of the Term Auction Facility to $600 billion, from $300 billion. On top of that, the central bank plans to provide an additional $300 billion to banks to meet their end-of-the-year cash needs.

To pay for its burgeoning responsibilities, the Fed has no choice but to keep printing more money. To prevent that flood of new money from reducing the central bank's overnight interest rate to zero, the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.

Paying interest on reserves allows the central bank to set a floor on interest rates and retain at least some control over monetary policy.

In its announcement on Monday, the Fed said it would pay an interest rate of 1.25 percent —three-quarters of a point below its target of 2 percent for the overnight Federal funds rate.

But the possibility of propping up the vast market for commercial paper could represent an undertaking even broader than the Treasury Department's plan to buy as much as $700 billion in mortgage-backed securities.

In statements on Monday morning, the Federal Reserve and the Treasury said they were "consulting with market participants on ways to provide additional support for term unsecured funding markets."

By referring to "unsecured funding markets," policymakers signaled that they wanted to intervene directly in the credit markets. Officials said Monday evening that they wanted to finish a plan as quickly as possible, perhaps as early as today.

But the effort is fraught with legal complexities. Though the Federal Reserve has sweeping power to create money and lend it out, experts said it is normally prohibited from buying assets that could lose money.

One way around that legal limitation would be to provide money to a separate legal entity that would do the buying and investing on the Fed's behalf. That would be similar to Maiden Lane Funding LLC, a special-purpose entity that officials created last spring to hold $29 billion in hard-to-sell securities from Bear Stearns.

Anonymous said...

Most of the 55 trillion in default swaps offsets each other. One guy owns a default swap on GE to someone and is short the same thing to someone else.

The mortgage market is 11 trillion. If losses are 1 trillion, then that's 1 trillion. If 55 trillion in default swaps are written on it..then maybe some portion of that changes hands...from the losing side to the WINNING side. It's not a net cost of 55 trillion.

It's like saying there's 40 billion bet on the super bowl. Does that mean the coutnry is 40 billion poorer the next day when one team loses? The losers are 40 billion poorer and winners 40 billion richer. I don't think most banks are in that deep where they wrote that much net exposure.

Again there's only 11 trillion in mortgages. Only 900B in subprime left 1/3 of which is in default. 1 trillion in alt-a. I dont' know they've already reserved 600 billion against this mess. Even if all teh alt-a and all the subprime goes bust, losses probably woulnd't be much more than 600 billion.

AFter all, if 2T of mortgages go bad (great depression) and recovery is 50%, that's 1T in losses. not 55T.