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Thursday, September 18, 2008

A Cupful Of Water On A Burning Building

Reminder: That post I said I was writing about causation is below this one.

The much ballyhooed $180 billion swap facility extended by the Fed is a pittance, a few crumbs, a cupful of water thrown on a burning building. For comparison purposes, just look at this Wells Fargo page of summary statistics for 2006.

It was estimated that over $100 billion in loans by all entities were secured by businesses and property in Orange County, CA in 2006.

The UK move to ban shortselling financial shares will stem the pace of the slide, but that's about all:
The U.K.'s Financial Services Authority today banned short- selling of financial companies for the rest of the year and will require daily disclosure of all existing short positions in such firms when they exceed 0.25 percent. Three U.S. Securities and Exchange Commission rules that took effect today aim to reduce manipulative trades betting on a drop in share prices.
This is pure and simple global panic. The likely outcome are various pools of assets turned in for loans by governments and lending facilities by governments from those pools and the revenue. The only way to stem counterparty fears is to interpose a government-guaranteed entity to allow trading to resume.

For what it's worth, the recent movements in T-Bill yields show that the money markets are gone, frozen, locked tight, with recent 1 to 3 month bills having traded below 10 basis points (0.10%) for several days. The federal government is about the only financial entity that can raise money other than banks taking insured deposits.

The situation for businesses currently overloaded with debt, any type of businesses, is dire. A2/P2 nonfinancial overnight rates are still about 6%. See Fed publication:

A2/P2 (subprimey) nonfinancial credit is hanging out there in the stratosphere with the asset-backed.

Now what's going to happen to all those real world companies that need money?

Note that the blue curve (non-financial) has jacked up there in sync with the advance in production. According to these numbers, a bunch of retail outfits will go out of business or merge, and a bunch of production outfits will either go out of business or be forced to limit business activity due to funding crunches.

NACM's last few reports hinted as much, with the indications that payment streams had slowed. From the last report:
“Slow pay seems to be the biggest problem.” North noted that a manufacturer of valves and pipes reported, “Customers are looking for ways to slow payments.” A plastics producer replied, “We are having to exert more effort to get payment for receivables,” while a sheet metal firm reported, “We have some of the bigger customers attempting to extend terms.” North said, “On the flip side, international business seems strong, probably due to the weaker dollar, which makes U.S. goods more competitive abroad.” A food manufacturer responded that “international sales are increasing very fast,” a furniture manufacturer noted, ”Our sales are up on the international side,” while a producer of carpeting reported, “…sales to Latin and South America…have increased.”
“Providers of HVAC and electrical equipment services noted that they are seeing more NSF checks than ever before,” he said. Other survey responses that stood out include a supplier of transportation services that said, “Customers that have never been a problem are going beyond terms.” A repair service stated, “Many customers are expecting us to be their bank!” And reflecting on the “credit crunch,” a participant in the plastics industry reported, “We are seeing more companies close due to lack of bank funding.”
This is a classic credit crunch. As that blue line falls, the economy slides down. It's that simple.

Glad to see that you are not spouting the mantra that a Resolution Trust type exercise is about to be the solution to all our problems.

The assets placed in RT were already "owned" by the government following the S&L's being closed by the regulator. Nobody has yet said how the distressed/busted bonds are going to get from the bank's into RT. They would have to be bought, but at what price, and set by whom?

Best thing the Fed could do tomorrow is suspend Mark to Market for 12 months. M2M seems to vary from 20c to 80c and is hardly precise when the originator has to lend the purchaser the money in the first place.

Our FSA has banned shorting the financials which they should have done in June/July.

Saw Cramer on CNBC this evening saying none of his friends were shorting stocks who normally did so but offered no insight into who he thought was!!! Curious!

There was also a CNBC interview with the CEO of a pension fund who had just announced they had stopped lending stock to short sellers.

The smug CEO went on to say that he did not know who they had previously been lending stock to.

How a CEO of a pension fund could plead ignorance of the identity of those to whom he lent the funds assets would indicate that the Trustees should add his name to the unemployed register.

For a pension fund CEO to lend shares(UK)/stock(USA)owned by the fund to persons he said he did not know, for the purpose of driving down the price of the investment, which will be followed by credit rating downgrades, margin calls, lower stock price, until the firm fails and the stock is worthless, is beyond comprehension, and certainly against the best interests of the members of the pension fund.

It's a strange world, but at least here in London our regulator has woken up at last. Must be the long City lunches!!
Covey, I agree that the best thing to do would be to suspend the mark to market rule for whatever time it takes for these companies to go through the CMOs and find out what they're really worth. That would restrict the government's role to oversight to make sure none of the companies were cheating or hiding losses. It would hopefully allow the credit markets to function again.

As to who was shorting the stocks. Who would profit from driving the economy into the ground? George Soros? Some ME wealth funds? Some hedge funds who have no concern about causing a worldwide financial meltdown? Just a bunch of hot shot traders with hot hands? Several possible culprits. We may eventually find out, but I'm not holding my breath.
MoM, we received our power back this evening. So thankful!

I can't believe all the news I have been missing since Ike has hit. I feel like our world has just turned upside down. Very glad to be back.
Viola - I'm glad life is improving. There is nothing like being clean!!!

Covey and Jimmy - well, all traders are rated on profits, and it is likely that some traders were trying to profit off the risk. That is the theory behind hedging. So I don't find it surprising that this was going on.

There is a danger in short-selling, though. You can create a catastrophe as it becomes a self-fulfilling prophecy. I'll call that a "downside bubble", and it is similar to the commodity bubble and housing bubble in that a large mass of followers take something past the point of believability.

Remember I posted once I was just waiting to hear some Survivalist fanboy going on and on about "WHEN PUSH COMES TO SHOVE, THE MOST PLENTIFUL FOOD SOURCE *WILL* BE *HUMAN FLESH*! PREPARE TO DO WHAT MUST BE DONE TO *SURVIVE*!!!!"?

Wait no more. I heard it in passing two days ago.
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