As you already know by now, the US Federal Reserve today announced that it would inject $200 Billion into the banking system in exchange for debt that includes mortgage-backed securities. This is an unprecedented move in an effort to stave off a a credit crisis of epic proportions.
This is not to be confused with the Term Auction Facility announced in December to loan funds to banks in exchange for – amongst other things – mortgage debt. Today’s move includes the actual securities (whose value we’ll discuss in a minute) that were created by bundling a bunch of crappy mortgages. If you need a lesson on this, please take a minute to review the following cartoon but educational illustration of how sub-prime really works.
Will It Save The Day Or Delay The Inevitable?
Too early to tell in absolute terms but I am going to vote this is a mere delay of the inevitable. Why? Take a close look at quotes from around the web from people much smarter than you and me. Believe me when I tell you that I looked for quotes from both sides of the equation:
``This is the most significant step the Fed has taken so far,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “This relieves some of the pressure” in the credit markets, he said. (Bloomberg).
“They’re trying to put out fires to the best extent they can,” said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, who is a former researcher at the Fed Board of Governors. (Bloomberg).
“This will assist some of the big banks,” said Walter Gerasimowicz, head of Meditron Asset Management, which manages $1 billion. “But it won’t bring the light at the end of the tunnel. The housing-market problems will take at least all of this year to settle, and until that happens, the banks aren’t going to be relieved fully.’ (Bloomberg).
“This morning’s announcement by the Fed helps the brokers and their fixed-income hedge fund clients who were struggling with funding,” Brad Hintz, an analyst at Bernstein Research, wrote in a note to investors. (Marketwatch)
“The good news is this will help brokers and banks; the bad news is it will do nothing to help the Housing market, or stop the decline in House prices.” (The Big Picture)
HELP FOR BANKS. NADA FOR HOMEOWNERS
How do you read these quotes? Personally, they all came across as the Fed solution being one that merely band-aids the solution, rather than solving it.
Moreover, it seems pretty clear that the Fed is acting to protect banks, not individual homeowners at risk of losing their homes. To this end, Marketwatch has a great article claiming the move was made to stave off a serious and imminent danger at Bear Stearns. This is a must read article but here are a couple of excerpts:
“Bear’s stock dropped 11% on Monday on concern that its borrowing costs are rising. For a brokerage firm, which relies on steady access to financing, such disruptions can restrain its businesses and leave it at a disadvantage to financially stronger rivals.”
“The Federal Reserve’s actions today may have been strongly influenced by Bear Stearns’ problem,” (Dick Bove, Analyst at Punk Ziegel & Co.).
When I add it all up, the following three conclusions come to my mind:
- Nobody thinks this is a solution to the credit crisis.
- This Fed solution is aimed at helping troubled banks, not homeowners.
- The Fed had no choice as the collapse of a major financial institution was imminent.
On a final note, the fact that Gold did not experience a major setback serves as further evidence that the Fed has done nothing more than delay the inevitable. Given gold’s rise over the last several months, major profit taking should have been taking place in response to this $200 Billion solution. It is trading at $US 974.00 as I write.
Regards,
George
