They just keep surpassing themselves
Sep. 19th, 2008 07:19 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI really have to be careful about phrases such as "the biggest bottle-job in history" (passim AIG) and "the last throw of the dice (see comment on the FMs bail-out), because the Fed and the Treasury are now coming up with "answers" that you really couldn't make up.
Amid the frontline public events, some of the back-office stuff gets lost in the wash. Yesterday morning (and the previous night), the inter-bank lending system effectively stopped. No-one would lend to anyone -- so great was the fear of a toxic fall-out because of Lehman exposures. This was why the US casually quadrupled the amount that it was making available to banks. It had to. The Central Banks were the only game in town. Although it wasn't publicized as such, we actually saw an important part of the banking system fail yesterday; a matter which, if you are in a capitalist system, you have a right to find a mite worrying.
The Bank of England put in $60bn or thereabouts (the US put in $180bn) and promptly found its offer three times oversubscribed. Forget all this surface stuff about possible downgrades for Lloyds-TSB. Forget the fact that Macquarie Bank might not be around come Monday. This was a freezing of the financial system that no-one had seen before.
And then Hank Paulson effectively threw in the towel by saying that the US was looking to create a new agency that would, for want of a better phrase, take on all the subprime shit. This is just about the ultimate "get out of jail not very expensively" card for the financial institutions that lent so recklessly. All that toxic sludge can be passed on to the taxpayer.
So, you might say, what's the real problem? Eventually it will work through the system; we will find out how bad it all is, and things will get back to normal.
Well, problem (1) is that moral hazard will now be alive and well again. There hasn't been enough punishment of the reckless lenders, not by a long chalk.
Problem (2) is less theoretical. For the first time, US debt is looking less than pristine. The cost of insuring a 10-year US bond is now 26.5 basis points* -- that's double the cost of insuring a German 10-year bund. Now, that's still fairly small beer compared to insuring something like Ford debt (I dunno, that's probably about 600 basis points now, for five years' debt rather than 10) but it's a sign of the times. No country has a god-given right to a triple A rating. Even the US has to realize that if it keeps on bailing out piles of shit, some of that shit will stick to its shoes. Eventually, the smell gets a bit too strong.
Now, when you look at what happened when AIG lost its triple A rating, just try to comprehend the global financial impact of the US sovereign debt rating moving from triple A to double A. Well, it's an interesting thought experiment, because, to be frank, I just haven't got a clue what would happen.
(And, as a minor aside, insuring against a US bond default is the ultimate matter of an accounting tail wagging a real-money dog. If US debt went into default, what insurer out there is going to be around to pay up?)
And don't even get me started on the banning of short-selling in financial stocks in the UK. The one good thing that will come out of this is that people won't have short-sellers as a whipping-boy when the next crisis comes around (expected arrival time, hmm, let's say Tuesday, 7am).
______________________
*26.5 basis points means you pay $26,500 a year to protect against a default on $10m in debt.
Amid the frontline public events, some of the back-office stuff gets lost in the wash. Yesterday morning (and the previous night), the inter-bank lending system effectively stopped. No-one would lend to anyone -- so great was the fear of a toxic fall-out because of Lehman exposures. This was why the US casually quadrupled the amount that it was making available to banks. It had to. The Central Banks were the only game in town. Although it wasn't publicized as such, we actually saw an important part of the banking system fail yesterday; a matter which, if you are in a capitalist system, you have a right to find a mite worrying.
The Bank of England put in $60bn or thereabouts (the US put in $180bn) and promptly found its offer three times oversubscribed. Forget all this surface stuff about possible downgrades for Lloyds-TSB. Forget the fact that Macquarie Bank might not be around come Monday. This was a freezing of the financial system that no-one had seen before.
And then Hank Paulson effectively threw in the towel by saying that the US was looking to create a new agency that would, for want of a better phrase, take on all the subprime shit. This is just about the ultimate "get out of jail not very expensively" card for the financial institutions that lent so recklessly. All that toxic sludge can be passed on to the taxpayer.
So, you might say, what's the real problem? Eventually it will work through the system; we will find out how bad it all is, and things will get back to normal.
Well, problem (1) is that moral hazard will now be alive and well again. There hasn't been enough punishment of the reckless lenders, not by a long chalk.
Problem (2) is less theoretical. For the first time, US debt is looking less than pristine. The cost of insuring a 10-year US bond is now 26.5 basis points* -- that's double the cost of insuring a German 10-year bund. Now, that's still fairly small beer compared to insuring something like Ford debt (I dunno, that's probably about 600 basis points now, for five years' debt rather than 10) but it's a sign of the times. No country has a god-given right to a triple A rating. Even the US has to realize that if it keeps on bailing out piles of shit, some of that shit will stick to its shoes. Eventually, the smell gets a bit too strong.
Now, when you look at what happened when AIG lost its triple A rating, just try to comprehend the global financial impact of the US sovereign debt rating moving from triple A to double A. Well, it's an interesting thought experiment, because, to be frank, I just haven't got a clue what would happen.
(And, as a minor aside, insuring against a US bond default is the ultimate matter of an accounting tail wagging a real-money dog. If US debt went into default, what insurer out there is going to be around to pay up?)
And don't even get me started on the banning of short-selling in financial stocks in the UK. The one good thing that will come out of this is that people won't have short-sellers as a whipping-boy when the next crisis comes around (expected arrival time, hmm, let's say Tuesday, 7am).
______________________
*26.5 basis points means you pay $26,500 a year to protect against a default on $10m in debt.
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2008-09-19 08:16 am (UTC)The Bad Bank
Date: 2008-09-19 08:37 am (UTC)The only hassle is that given that it's the Fed/govt doing this, they may be bullied out of paying the market price and will end up paying the fair price or higher. That won't deliver the bollocking that the CDO merchants deserve. Here's hoping that some hard-nosed bastards come in to run the Bad Bank.
Re: The Bad Bank
Date: 2008-09-19 02:25 pm (UTC)DY
no subject
Date: 2008-09-19 02:58 pm (UTC)Niall L.
no subject
Date: 2008-09-19 03:16 pm (UTC)PJ
Re: The Bad Bank
Date: 2008-09-19 06:48 pm (UTC)Thrift Shop Special
Date: 2008-09-19 08:19 pm (UTC)I'd love to know what name they come up with for the Bad Bank. Whose cretinous idea was that? "Yes, we'll take absolutely all of your toxic waste, and put it on a barge to Florida." They could call it the First Rosewater Bank of God Reincarnate, and everybody else would still call it the Bad Bank. What was that again about "we've moved past the Liquidity Crisis: now it's all about the Confidence Crisis?"
I must confess my head is spinning. Not about the economics -- they're fairly freaking obvious, and we've pretty much nailed those down over the last year or so. I mean, it's coming to something when I can agree with JB on well over 50% of the substantive points he (even in jest) makes.
No, it's the relentless dullard commentary ("Let me explain what a 'naked short' is." Doh. Pass the heavily sugared donut).
No, it's not. It's the spectacular mass reverse ferreting.
"The Anglo-Saxon system is the wave of the future" ... "except when it fucks up."
"Government interference invariably makes things worse" ... "except when it's absolutely necessary within the context of the play."
"Short selling is an important tool for shaking out the dead wood in an efficient market, which is what we have" ... "except that we won't admit it, and we actually don't have a clue because it isn't transparent, but we might not have an efficient market. Oh, and I didn't realise that there might be a cascade effect attached to short selling. Silly me. I should have written a computer program, or read a book, or something. It's bad. Really bad. Naughty, in fact."
The weird, and possibly only sane, thing about all this is that it makes G Brown look like an abject, crawling, ignorant little beetle. He really should be able to manage all this -- after all, getting Lloyds to do the dirty for him is more than the Feds have managed. It might be just inept spin, but I suspect that it's what I've known all along -- the man is a humourless, obsessive dolt. He actually deserves it. What's more, it's no use explaining that he's West Lothian and has somehow forced this mess on us, because (en masse) we deserve it. No matter what the Telegraph might think.
It's coming to something when Alex Salmond, of all people, can be hailed by the Express and the Mail and the Telegraph and Mrs O'Droole of 23 Acacia Avenue, Epsom, as a Financial Guru.
There's more, but I can't face it.
Like you, I just wish I had the basic tools at my disposal (a million quid to play with would be a good start; plus the connectivity you correctly identified the other day) to work this bugger. James really should come out of retirement. Even he can't fuck up.
What price "The End of History" now? Well, it can no longer be insured, I suppose, but there's probably a secondary market in Collateralised Historical Alpha to Omega Strategies.
But, as I say, I've taken more than enough paracetamols to escape from the sweeping tides of gormless panic, and I think we should talk about The Next Big Thing. Something New.
You know, like China. I have theories about this. (Not about Russia, because Putin and the Nomenks are still in 19th century mode and will be Crucified by the Goat.) China is heading towards interesting times. And we all know what Confucius said about Interesting Times.
(By "interesting," I most certainly do not mean "World Domination." I mean "Interesting.")
Re: The Bad Bank
Date: 2008-09-19 08:28 pm (UTC)It's an interesting side issue, isn't it? The dross is no longer on the market. More and more dross will be pulled from the market. However, there's still an obvious market in dross; it's just dross tied up in a Fort Knox lead-lined bank.
Pace Goldfinger, I suspect that there's a non-violent opportunity here. (Actually, remembering the plot, and thinking about the neocons still in charge over there, there's a ... ahem ... slightly less palatable opportunity here.)
Looks like an obvious opportunity for online spread-betting to me. Hello again, secondary markets. When will the Feds release the medically scrubbed and non-toxic bits and pieces? And how often? And at what price?
Why, if we made enough money on a scam like this, we could leverage it to buy Goldman Sachs. I hear a monkey will do nicely. (That's five hundred, not a simian, although it's a forgiveable mistake given the last ten years.)
Re: Thrift Shop Special
Date: 2008-09-19 08:53 pm (UTC)