Just a week or so ago the overnight LIBOR rate, this is the rate banks loan money to each other at (such as prime plus LIBOR or similar), was a paltry .17% and today it is a whopping .22%. While this is might not seem like a huge issue, and it is not on its own, it is a signal of something. Perhaps it is signaling that the wall of liquidity is coming to an end or that there is more risk lending to institutions than originally thought. Or, perhaps, Zero Hedge’s rumor mill was right and some of the GSE’s cut off 10 European banks from lending which caused the overnight rate to shoot up, it looks like they had it nailed.
I typically do not act or comment on rumors because some 90% are not true, but this one I watched because LIBOR was one of the signals preceding the credit crisis beginning in 2007 to 2008. If this rumor ends up being true, and it looks that way, I think there will be some negative implications for the equity markets as the rally is liquidity driven. However, LIBOR at .22% is nothing to worry about, at all, and unless it climbs higher I would not be worried, but it is on my ‘watch’ screen as it has implications. Also, the LIBOR rate is outside of the Fed’s control, frankly, as they already spent all their ammo in that department.
Well, let me rephrase that, they would need to start up recently closed programs and institute new programs in order to bring down the interbank lending rate. The markets are not fully healed and credit is still tight meaning that trust is still lacking in many areas. Credit is merely trust and, frankly, would you really trust a European bank right now? Who knows how much Greek debt they hold or other PIIG debt they have on the books. If you do not know you cannot trust them. If you can’t trust them you do not extend credit to them or you charge them more for credit to cover the potential risk. It is a vicious cycle and the system cannot handle any other shock or it will be in jeopardy again.
I am not saying there is much to read into, yet, but keep an eye on it as little things like the LIBOR usually signal or are the first sign of potential larger problems. It also looks like the Zero Hedge rumor mill was on to something, I am going to email them to see if they have a follow-up on the story. In the mean time, do not look for anything exciting from the Fed meeting, nothing will happen and the language will not change, which should concern you as well. Trade carefully and the market that is in front of you, I bought August VIX calls today as volatility is way too cheap, historically the VIX is at 20, and there seems to be no one betting it will go down, look at the put action.
Haven’t we learned anything about legacy political leaders after the Bush years and countless other Congressional leaders who “inherited” their seat from a parent? Part of the reason the US is in shambles is because we elect these people, why I do not know, and they are ignorant about the problems the country faces. It is no secret that Mario Cuomo was extremely liberal and responsible, in my view, for NY States horrible financial condition because of his socially liberal programs. While I was young during his reign even I knew he was a terrible governor, but we elected Pataki twice so New Yorkers are not known for picking the better candidates.
Now we might be living under another Cuomo who is also a terrible leader and, as Dick Bove claims, largely responsible for the GSE’s collapse. According to Bove, Cuomo’s relentless pursuit to force Freddie and Fannie to loan to the poor led to the GSE’s into buying sub-prime mortgages and eventually their collapse. Frankly, in my opinion, Mr. Bove is correct, you will not hear me agree with Bove much I might add. Cuomo took the GSE’s and many banks to court because of discrimination, some of which I am sure is true, but his main problem was that banks were not loaning money to the poor. Now, I am not a rocket scientist, but I do know if you loan money to poor people who do not have the ability to pay back loans they will eventually default. The banks knew this and that is why they did not lend money to the poor, yes, some discrimination probably existed though.
Because of his zealous behavior we know have had to guarantee Freddie and Fannie for unlimited losses, which is also why the Fed will stop buying MBS’s as well because the GSE’s can now pick up the slack. With NY in such dire straits, and we are, is it wise to elect another lawyer to the governors position? I think not. Surprisingly, I actually like our current governor, who is a Democrat, because for all of his faults he realizes what a horrible position NY is in. He is actually trying to cut spending, but is met with the same corrupt response from the unions and Assembly that usually appears when you try to take money away from their interests.
Patterson is a mess and not the best person for the job, but I would vote for him over Cuomo any day of the week. Of course, Obama and other NY Democrats want him out, are you really surprised over the recent scandals breaking? My belief is that these timely scandals are appearing because Patterson is trying to cut spending which will impact many social programs like schools and welfare. Those are the Democrats pet projects and by cutting spending there, which is the primary reason for our fiscal distress I might add, he was a marked man and is now out.
Cuomo will be a party man upping the spending as much as the market will allow, but that will not be too much more given our deficits. He will do what he is told and not make those hard decisions because he is just like his father, a tax and spend liberal without the knowledge on how to pay for it. It is far easier to get reelected when you make your base happy and paper over the major problems. However, our problems here are so severe they cannot be papered over any longer. They have already robbed the highway and bridge trust fund to pay for the interest on our debt, that money was supposed to be secured for, well, highways and bridges.
How anyone can look to this man or to the Democratic Party in NY is beyond me. They have shown themselves to be horrible when it comes to financial issues and refuse to make the hard decisions. I am referring to NY Democrats not Democrats nationwide. I will not vote for him and I will find it difficult to vote for the Republican challenger, Rick Lazio is potentially the R’s candidate, because politics in NY have not changed. They simply pick the next person in line who is ‘due’ for the next run at a major office. I almost hope we go into receivership as it will let some sane court appoint conservator to get rip of the ridiculous contracts the unions have and, ultimately, uncover all of the corruption we know exists, but has been masterfully hidden from the public.
Ben Bernanke may in fact seem like the unassuming soft spoken professor who is well spoken and polite, and he is, but at the same time he is perhaps suffering from the greatest of the deadliest of sins, pride. I am translating pride into arrogance with Ben because it is essentially the same thing and the sin is identical. There is also no question that Ben suffers from the delusion that he s right and everyone else is wrong, which is how we can tell that he suffers from this disease of arrogance wich will be his ultimate downfall.
I am referring to an article I read this weekend from Reuters, which was reprinted on Bloomberg and various other news sources, where Ben announced that it was not the Federal Reserve’s wall of liquidity during the early 2000’s that caused the housing boom, and subsequent bust, but rather lack of regulation. First of all, he is wrong, because without the liquidity easy credit or the showdown securitization mortgage market simply would not have existed, that is obvious. What is not so obvious is the fact that his regulation argument is also an attack on himself. While Congress did encourage the GSE’s and banks to loosen credit standards, so did the Federal Reserve Bank and the Fed had some significant regulatory authority over these mortgages.
Am I the only one that finds it ironic that Ben, Man of the Year, Savior of the Economy, or whatever else we are calling him now, is the same guy saying that his wall of liquidity is not to blame and more regulation’s was the answer, when part of his job was to regulate the banks? Granted, the Fed’s job in regulating the banks is somewhat small, but are we forgetting Greenspan’s famous speech were he encouraged banks to get more inventive when it came to mortgage origination? This does not sound like getting tough with banks, in fact it sounds like it was a green light to do whatever you want to get homeowners into a house.
Essentially, the Fed gave its blessing to do whatever it took to get people to sign the dotted line on the mortgage application. Not only that, the Fed also provided the liquidity to encourage the lax lending standards. Having just one of those two things is bad, but both combined is disastrous, which we found out. However, our Savior still does not realize that it was the Fed at fault for this mess and I think I know why he is saying this now. He simply wants to be left alone. He figures with his reappointment a done deal, his Man of the Year award, and the magical 25% S&P 500 returns in the market people will get off his back as he built up some credibility, especially the audit the Fed people.
I honestly believe he thinks that his sins of the past can be forgiven because of his recent ‘accomplishments’ which were not really accomplishments. If anything Ben was merely picking up after himself, but with our money. To put everything into perspective on how Ben feels here is how the article ended, and what he thinks caused, I guess, the credit crisis:
“Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.”
That is that I guess. He was partially right, but it was not just ARM’s that were the problem, not at all, it was a whole slew of mortgages that were problems. There were jumbo’s that trigger higher rates if the LTV slides below a certain value, there were sub-prime, there was the fact that the asset bubble from the Fed was not just in housing, but in commercial real estate and, well, everywhere. The question is why were people betting so heavily on housing prices to rise? Perhaps because the liquidity spigot was going full force for way too long and then when you went to turn it off the effort was meager at best. Regardless, the biggest problem now is with all types of mortgages, not just ARM’s and sub-prime.
The sheer arrogance of this man is just unbelievable though. The one thing about the deadly sins is that they are deadly and catch up to you, pride is always the one that kills the worst to. At first it was nice to see Ben apologize for the Fed’s role in the Great Depression, but how could we go from a guy who knows that his organization caused the Depression to him denying the Fed caused this problem. What happened over the last 4 years to Ben where he could state the obvious before only to deny it know? It makes no sense other than he suffers from the affliction of arrogance or pride. What I do know is what Ben is doing, long-term, will not work, because Ben has a terrible track record, and the Fed’s powers are on the verge of finally being reduced, which is a great thing as the system failed us greatly and it’s time for it to go.
No matter what Ben and Greenspan are to blame for a large portion of what happened. I am not saying that Congress is innocent, you know me better than that, and I am not saying that those who lied or bought houses they couldn’t afford are innocent either. However, legitimate fraud too place, even to reasonably intelligent people, the Fed let things happen that they should not have and Congress, well, Congress is just incompetent, what do you expect.
GMAC is apparently close to yet another $3.5B in additional aid from the government. This is on top of the original $12B the firm already received the first go around. Of course, the government will insist that this ‘investment’ will be profitable just like CIT, GM, Chrysler and anyone who invested with Bernie Madoff. This news comes on the heels of the Freddie and Fannie announcement that the government will backstop all, not just the original $400B, of the GSE’s losses which could be trillions at the end of the day.
Of course in the case of Freddie and Fannie the top executives will continue to receive millions in compensation because it takes talent to lose billions, it must because Brewster, of Brewster’s Millions, could barely do it if you remember. I find it hard to believe that anyone could possible argue that these bailouts are not permanent or will end at any point in the future. I think this latest blast of reality from the state owned automaker and mortgage issuer is proof enough that these bailouts will continue indefinitely.
The irony is that we are seeing all of these bailouts or ‘additional investments’ in the face of the greatest economic recovery that never was. Let’s face it, when the fantasy 3.5% GDP was whittled down to 2.8% you could live with that because that meant there was still private sector activity, but now that the official 3Q09 GDP figure is 2.2% that means there was no private sector activity at all. That was also with cash for clunkers and the housing tax credit in full force as well. Of course last week’s housing numbers showed us what the housing numbers will look like without government help, in a single word awful, but imagine when mortgage rates are at 6%. Regardless, if things were rosy then I find it hard to believe that GMAC would need more money.
Oh, I forgot, Citi and the rest of the banks are paying back TARP, sure, that means that banks are doing fantastic. Did you read the beginning of the story, the bailouts are permanent and these banks know 2 things, 1) the government will never let them fail; and 2) TARP is not going anywhere. Not only that, but these banks also carry massive guarantees on their portfolios and FDIC issued debt so the repayment of TARP, I am stealing this from Whitney Tilson, is the greatest scam ever. Basically the banks now can pay themselves whatever they want, they have guarantees on the crap on their books, implied guarantees, can issue guaranteed debt (in some cases), now they pay far less for many of those privileges and the government lost 90% of its leverage – nice job guys.
The payback of TARP does not mean banks are healthy it simply means the banks can go to the market and get other suckers to buy their debt to get Uncle Sam off their back. I did not think it was very hard to figure out, but apparently it was because the media and investors are swallowing this stuff hook line and sinker. The proof is in the pudding and bank stocks have done nothing since August and, frankly, the only good one is JP Morgan and who really knows what is on their offshore books or what they are really on the hook for through Bear? To think there will not be a need for another TARP bailout in the near future is crazy, banks would not be holding all this cash if; 1) the economy was really recovering; and 2) they were really as healthy as they want us to believe.
I may have been wrong about a correction this fall, I admit that, but there is no way that the continuous flow of bailouts can be framed as a good thing. Oh, if you are happy about Freddie and Fannie executives paying themselves millions, I would suggest calling your representatives and letting them know how you feel, especially if your in Barney Frank’s district because he really doesn’t care about you.
Since Freddie and Fannie’s demise in September of 2008 Congress has been trying to figure out what went wrong. I guess they forgot how regulators in 2003 said there were significant problems with how they ran their books, but Barney Frank, Maxine Waters and others said that there were no problems and they were financially sound. It is funny how government always forgets how they screwed up, but punishes other companies endlessly on their missteps, especially when they do not donate to their campaigns.
Regardless, we all remember that shareholders were wiped out and the government threw them hundreds of billions in lifelines as the firms were officially insolvent or close to it. Bother firms are still very active in the mortgage market and guarantee $5.3 trillion of the $12 trillion US mortgage market. The primary function of these firms was to make homeownership affordable apparently at any cost.
Unfortunately we are now all paying for those guarantees mostly because of their inability to manage risk, but more because Congress kept pushing them to make riskier loans. At this point arguing who exactly is at fault is irrelevant as these firms are owned by the government and will be, according to Moody’s, in the future.
Here is the good news, these firms did so well that it is likely that another agency will replace them. I assume it is under the same type of quasi government guarantee system that Freddie and Fannie had, but who knows at this stage. This is why government should have no ties with private business because at the end of the day it doesn’t matter if that business was a complete failure since they can just fund, with our tax dollars, another attempt at the same mistake.
It is just unbelievable that the government would be allowed to engineer a replacement for these failed institutions. The reason why the government will not place either of them back in business is because their names are tarnished. I realize that many Americans will have forgotten about the previous failed institutions by the time they re-launch the new entity or entities, but that is still no excuse. I am even willing to bet that they bring back the same management teams because they will have the depth of knowledge and experience they need to run such a large operation.
In a nutshell, we can start over again, take them public and then watch them fail only to have more shareholders wiped out again. I know I am presuming a failure before the endeavor is even tried, but think of it this way, look at all the warnings Congress had and then look at what they did, even after Freddie and Fannie got caught, and then tell me what you think will happen. I can hardly wait for Freddie and Fannie 2.0, it should be a fun ride.
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