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First! To be OT
I found this to be interesting. I was wondering if maybe any of you might.
Theres a mystery on Wall Street. Merrill Lynch last week wrote off $8.4 billion in its subprime mortgage business, a figure revised up from $4.9 billion, yet Goldman Sachs reported an excellent quarter and didnt feel the need for any write-offs. The real secret of the difference is likely to be in the details of their accounting, and in particular in the murky world, shortly to be revealed, of their Level 3 asset portfolios.
Both Merrill and Goldman have Harvard chairmen Merrills Stan ONeal from Harvard Business School and Goldmans Lloyd Blankfein from Harvard College and Harvard Law School. Thus its pretty unlikely their approaches to business are significantly different or is a Harvard MBA really worth minus $8.4 billion compared with a law degree? (The special case of George W. Bush may be disregarded in answering that question!)
We may be about to find out. From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks balance sheets. The new accounting rule SFAS157 requires banks to divide their tradable assets into three levels according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks own models.
Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldmans capital of $36 billion. In an extreme situation therefore, Goldmans entire existence rests on the value of its Level 3 assets.
Rest of article @
404 - Error: 404
I am thinking more like Arthur Herbert Fonzarelli but less cool. Just hit that Jukebox a few more times ad everything is cool.
Aaay!
That suggests P&G and Colgate have significant pricing power. A rate cut with rising prices and a moderate growth forecast? Who's the Fed Chief? Arthur Burns?
Note to self: More Costco runs this week on goods that never expire.
Huh, I moved my money in the Prudent Bear fund over to their Global Income fund today, because having money in the Bear fund after a rate cut has been a bit expensive, the last two times. It'll be interesting...
The fed will cut rates...each of the next three meetings. How much I haven't a clue.
Is needed to get a bit of inflation pushed further and thus rescue the debtors. I'm borrowing every dime I can wheedle and buying real estate now distressed...for even tho real estate prices are likely to go lower interest rates won't and the package is the deal, not the price of the property.
Will pay the debts in the future with cheap money, or sell at a higher inflated price....or let my heirs inherit at a stepped up basis.
Worked from 1996 until I started selling in 2004...so I would have a pocket full of cash for the coming crash....will work now too.
I'm perhaps too early in anticipation, but then I've never regretted selling the internet stocks 18 months before they bombed.
Life is a cycle, too bad we only get one shot at it.
Arthur Burns!!!!!!!!!!!!
OK CR I know it's Halloween, but please, some graves need to be left alone.
YouTube - Put the Candle back!
Cheers,
A rate cut with $90 oil.
A rate cut with a plunging dollar.
A rate cut with the Dow slightly off its high.
Can you imagine a rate cut in 1980 when oil was at its century high of (inflation adjusted)$95?
The good news spun by the bulls: the price of oil today is NOT at its all time high. It was higher in 1980.
I don't know how many times I have heard that.
Yes Ladies and Gentlemen. nothing to worry about here. Today's price of oil is only the SECOND highest (again, not the first highest) ever in the 200+ history of the U.S.
The one time it was higher, we suffered one of the worst recessions ever.
CR,
Wait a minute. You said a few days ago, a recession might be beginning right now. If you still hold that view, do you now oppose a rate cut? Or are you more sanguine on the economy? Is there a third or fourth option I am missing?
Oh yeah, I oppose a rate cut myself.
CR,
P&G's price increases will be particularly extensive, between 3% and 12% on goods including diapers, fabric softener and pet food.
That suggests P&G and Colgate have significant pricing power.
Yep, gotta diaper the kids, wash dishes and clothes, and feed the pets.
Also got to buy gas, and food...oh... and heating oil...and car repairs....sheesh...the stuff Shrubboy's gov't think we can do without. I guess maybe a plasma to watch the Super bowl whilest eating top ramen and freezing infront of the teley will be nice this February.
Sheeeeeeeesh.
Cheers,
Better to take a recession now than destroy the value of the dollar
"CR,
Wait a minute. You said a few days ago, a recession might be beginning right now. If you still hold that view, do you now oppose a rate cut? Or are you more sanguine on the economy? Is there a third or fourth option I am missing?
Banker | 10.30.07 - 10:51 pm | #
Oh yeah, I oppose a rate cut myself.
Banker"
Some oppose a rate cut BECAUSE they are not sanguine on the economy.
Super shelter tin foil hat on and charged. Checking bunker inventory. Man, I wanna say some day this war is gonna end, but Allen's got that. I'm in total Mogumbo mode (Daily Reckoning Authors and Contributors
Cheers,
I donna know when I last bought a branded product except for Crest Tooth Paste, Which I hope is not made in China.
Sam's Best, WalGreen's, Publix brand and so on store brands and generics.
The question is will the price stick.
Montgomery Burns maybe.
Look, the data didn't support the last rate cut. Why would anyone look to the data to see if the Fed eases this time?
Here is another good read. I just get this feeling something big is going to unwind soon.
Now the mystery has been unraveled. It turns out many mortgage-related ABCP issuers have gone to a lender of last resort, namely the Federal Home Loan Banks, which have extended $163 billion of loans to them. Like Freddie Mac and Fannie Mae, they are considered to be government sponsored enterprises. Even though the Federal Home Loan Banks are technically a cooperative of private banks, the Federal government is sufficiently involved in their oversight (for example, their board is appointed by the President and approved by the Senate) that they are regarded as enjoying government support and fund at favorable rates. Worryingly, and again like Fannie Mae and Freddie Mac, they have had accounting issues, but legislation mandating tougher oversight stalled in the Senate.
Full story @
Federal Home Loan Banks Standing in for Commercial Paper Buyers « naked capitalism
Robert Coté
Do you not know who Arthur Burns is????
Arthur Frank Burns - Wikipedia, the free encyclopedia
Cheers,
Now I do Misean.
Topher
Oh that is such good news. I think I'll go and consider jumping off the balcony now...to avoid the rush...so to speak.
Cheers,
50 bps. Bernanke is very concerned about the credit train wreck. Mishkin warned of this during the Jackson Hole conference and Bernanke was very attentive.
Topher,
Prior response was this:
Now the mystery has been unraveled. It turns out many mortgage-related ABCP issuers have gone to a lender of last resort, namely the Federal Home Loan Banks, which have extended $163 billion of loans to them. Like Freddie Mac and Fannie Mae, they are considered to be government sponsored enterprises. Even though the Federal Home Loan Banks are technically a cooperative of private banks, the Federal government is sufficiently involved in their oversight (for example, their board is appointed by the President and approved by the Senate) that they are regarded as enjoying government support and fund at favorable rates. Worryingly, and again like Fannie Mae and Freddie Mac, they have had accounting issues, but legislation mandating tougher oversight stalled in the Senate.
Cheers,
Peter
"A rate cut with $90 oil.
A rate cut with a plunging dollar.
A rate cut with the Dow slightly off its high."
How is it different now than last cut?
Another cut is coming, with a train of them following. The fed knew that the last cut was going to kick the legs out from under the dollar yet they did it anyway.
Why?
They're not dumb--they're scared. They see more than they tell. They know more than they admit. The money that they have pumped into the system over the last few months is becoming less and less effective.
Hence, rate cuts continue.
How does cutting rates help the economy?
I still don't understand this.
I understand that cutting rates can boost employment in the short-term, which is politically popular.
But if the current structure of our economy is leading to a poor outcome, do we really need to make efforts to sustain that structure? Doesn't that simply insure a poor long-term outcome?
It strikes me that it might be better for the economy if we were to spend some time fixing things and dismantling the unproductive parts, even if it lead to short-term contraction.
Please, help me understand this "rate cut cure" concept so I can take comfort in knowing that the central bankers really are our friends.
When you're a hammer, every problem looks like a nail. There are very few tools in the toolbox.
????? Misean
I'm not sure what you're getting at. It was only a little humor. I read your link.
"How does cutting rates help the economy?
I still don't understand this.
I understand that cutting rates can boost employment in the short-term, which is politically popular.
But if the current structure of our economy is leading to a poor outcome, do we really need to make efforts to sustain that structure? Doesn't that simply insure a poor long-term outcome?
It strikes me that it might be better for the economy if we were to spend some time fixing things and dismantling the unproductive parts, even if it lead to short-term contraction.
Please, help me understand this "rate cut cure" concept so I can take comfort in knowing that the central bankers really are our friends.
ac"
Bwahahahahhaha...
Ol' ac you're such the cut up. Of course a rate cut can't do shite. It's just that the sheeple think so because the stock market might nominally rise whilst real values plummet.
Shell game my friend, shell game.
Cheers,
At what point in the debasement of our currency does America start become a viable location for wage arbitrage? Even if you were ballsy and took that bet, it'd be what, 3 years to actually be up and running? Would manufacturers want to see an extended period of the USD weakness before commtting? Dryfly, this is up your alley.
Will China counter by upping automation to counter their own wage inflation?
The report, 'Market Turmoil and Accounting Impact: 10 Key Questions' is the result of Fitch's continuing efforts during the third-quarter 2007 market turmoil to review largely new accounting standards and reporting requirements and how they may affect analysts and investors' ability to obtain information they need to understand the repercussions of the recent market disruption.
In the U.S., the standards 'Fair Value Measurements' (SFAS 157) and 'Fair Value Option for Financial Assets and Financial Liabilities' (SFAS 159) will be mandatory for companies from fiscal-years beginning after Nov. 15, 2007 and early adoption by some but not all US financial institutions has rendered comparability more difficult. IFRS issuers have a similar fair value option that was implemented in 2004.
'The ramification of the changes in accounting for certain financial instruments and conduits can be significant for a company, particularly a financial institution, in terms of covenant tests, regulatory capital requirements and access to the capital markets,' said Dina Maher, Senior Director, Fitch Ratings.
In the report Fitch asks the following questions on accounting issues:
Fair Value Measurements
How is the fair value of financial instruments determined in the current market?
Are there opportunities for gains at initial recognition, i.e. Day One Gains?
How are companies that have not yet adopted SFAS 157 and IFRS companies reporting their fair value measurements?
Were any declines in the fair value of available-for-sale or held-to-maturity securities deemed to be impaired?
Fair Value Option
Why were certain financial liabilities marked to fair value?
Have the parent and subsidiary elected the fair value option on specific financial assets and liabilities in the same manner?
Loan Commitments
How did the company account for unfunded and funded loan commitments that have declined in value
Consolidation Issues
Did substantial losses by a variable interest entities (VIE) result in a re-evaluation by senior beneficial interest holders as to whether or not they must consolidate the VIE because of concern (or fact) that they, too, will be forced to absorb losses?
As a result of the decrease in fair value of the assets, has the company been forced to consolidate any VIE that it had previously determined was not required?
Have any actions that the sponsor took in support of a VIE (such as a securitized trust or asset backed commercial paper (ABCP) conduit) resulted in the reconsolidation of any entity that was previously accounted for off balance sheet?
The page cannot be found
Sorry Topher, so was I. I meant that this comment:
Topher
Oh that is such good news. I think I'll go and consider jumping off the balcony now...to avoid the rush...so to speak.
Cheers,
Was to this comment:
Topher,
Prior response was this:
Now the mystery has been unraveled. It turns out many mortgage-related ABCP issuers have gone to a lender of last resort, namely the Federal Home Loan Banks, which have extended $163 billion of loans to them. Like Freddie Mac and Fannie Mae, they are considered to be government sponsored enterprises. Even though the Federal Home Loan Banks are technically a cooperative of private banks, the Federal government is sufficiently involved in their oversight (for example, their board is appointed by the President and approved by the Senate) that they are regarded as enjoying government support and fund at favorable rates. Worryingly, and again like Fannie Mae and Freddie Mac, they have had accounting issues, but legislation mandating tougher oversight stalled in the Senate.
Because you commented to this before I posted:
"Do you not know who Arthur Burns is????
Wikipedia, the free encyclopedia
Art...Arthur_F._Burns
Cheers,
Misean | 10.30.07 - 11:01 pm | #
Gravatar Now I do Misean.
Topher"
And was trying not to be confusing. Obviously I failed. I was just joking with you on the initial quote.
Cheers,
NP, Cheers
"At what point in the debasement of our currency does America start become a viable location for wage arbitrage? Even if you were ballsy and took that bet, it'd be what, 3 years to actually be up and running? Would manufacturers want to see an extended period of the USD weakness before commtting? Dryfly, this is up your alley.
Will China counter by upping automation to counter their own wage inflation?
Alec "
It won't Alec because manufacturer's in USA have sold the co's down the river in pension costs. China will automate as is only logical as the cost of labour exceeds capital costs of automation equipment. This will not help US until assembly costs of things china makes is < the cost of shipping finished product. That, outside of packaging, won't occur until China is selling us things like cars. Just like Japan in the late 60's early 70's.
Cheers,
Do you not know who Arthur Burns is????
Do you not know who Montgomery Burns is????
Montgomery Burns - Wikipedia, the free encyclopedia
My point was that it is the robber barons who are dictating policy.
"Do you not know who Arthur Burns is????"
Nope
FOX Broadcasting Company: The Simpsons
"My point was that it is the robber barons who are dictating policy.
Robert Coté"
I don't believe in robber barrons. I do believe in US Fed Gov't created cartels that funnel wealth to vested interests though.
Cheers,
Oh, this is so exciting! I can hardly wait. The whole world sits on the edge of its seat, waiting for the illegitimate fed banker to make his illegitimate pronouncement over the world economy. The world shudders and waits for big Ben to come down off Mount Olympus to dictate terms to the peons. All hail the mighty maggot bankers!
I puked when I read that the Federal Home Loan Banks have already loaned 160 billion into the mortgage lenders -- 51 billion for Country wide alone -- in August and September. I am an amateur, but I thought we were going to have a full scale banking crisis in August. Now I know why we did not.
It seems that our government will, without hesitation, destroy the dollar and all our savings to prop up the failed financial sector. I recall Hank Paulson saying about the MLEC that "this is not a finger pointing exercise."
Jim Rodgers may have made a timely call when he declared he would was taking all his assets out of the dollar.
Things are bad, BB knows it. Rate cuts are comming.
Fertilizer ma
Reasons that would make sense for them not to cut this meeting.
Image = We are not Wall Streets water boy. Independence, restore some lost credibility.
Dollar = slow decent so it doesn't turn into a crash, not stop the fall but to slow it. It will have to fall more given our trade and budget deficit but they don't want a crash.
Commodities = Speculation of a dollar crash has been at least part of the fight into commodities not cutting would take some of the froth out of these markets. Goldman Sachs issued a sell on oil today.
Doesn't mean that's what they will do tomorrow though.
"Image = We are not Wall Streets water boy. Independence, restore some lost credibility.
Anonymous"
Much to late for that. This is a well known fact globally.
Cheers,
Banker,
I can't speak for CR, of course, but my take is that a high risk of recession is better than a high risk of stagflation.
Best,
re: Anon - "Goldman Sachs issued a sell on oil today."
yup, those buggers are amazingly tapped in to decision making or - even - they ARE the decision makers
. Since a temporary hold is dollar bullish and so is bearish on oil ( all other things being equal ), what do they know that I don't ?
-K
Sam's Best, WalGreen's, Publix brand and so on store brands and generics.
any bets on who makes those private-label products ? remember how many brands got pulled over the canned chili scare ? all those brands were being made in one facility. the rice-gluten mess also exhibited a concentration of manufacturing in a few plants.
I don't believe in robber barrons. I do believe in US Fed Gov't created cartels that funnel wealth to vested interests though.
Exactly. Add state and local gov'ts too in many ways they are worse.
That much we sure agree on.
BTW - I'm with Tim D, I do NOT see how a cut is justified. But I am fully prepared to be on the wrong side of this bet again. I was last time too - to the tune of 50 bips.
Hey dealer double me down 50.
CR, perhaps I'm splitting hairs, but I suspect that it's not so much an issue of pricing power, rather pricing necessity. That is to say, P&G isn't raising prices because they think consumers will bear it, they're raising prices because supply costs necessitate it. The typical consumers, who I think most of us suspect are overextended, will cut back, but margins will be, at least somewhat, preserved.
Wash Post - Time to Stand Up to Wall Street
Steven Pearlstein - Time to Stand Up to Wall Street - washingtonpost.com
3"re: Anon - "Goldman Sachs issued a sell on oil today."
yup, those buggers are amazingly tapped in to decision making or - even - they ARE the decision makers
. Since a temporary hold is dollar bullish and so is bearish on oil ( all other things being equal ), what do they know that I don't ?
-K
sk"
Ugh! Missed that. Great...Goldman's gonna pull a short on heating oil like they did unleaded gas last year. Great...these markets are to arbitrage supply to avoid shortages. I guess we'll have the serious shortages after 2008 because of this chicanery...GREAT
Cheers,
"I don't believe in robber barrons. I do believe in US Fed Gov't created cartels that funnel wealth to vested interests though.
Exactly. Add state and local gov'ts too in many ways they are worse.
That much we sure agree on.
dryfly"
I knew we weren't that far apart at the macro level.
Cheers,
ac wrote:
I still don't understand this.
I understand that cutting rates can boost employment in the short-term, which is politically popular.
But if the current structure of our economy is leading to a poor outcome, do we really need to make efforts to sustain that structure? Doesn't that simply insure a poor long-term outcome?
ac, your question goes to the very core of economics. Most economists today, including those at the Fed, have no appreciation for or interest in "structure of the economy" question, which they relegate to unfashionable "micro-economics". Macro people (for the most part) deal in large aggregates, GDP, employment etc. because they are the big picture guys.
Then there is a whole lot of number crunchers who apply sophisticated mathematical models to derive relationships and make predictions. They have no "feel" for the "micro-economic" stuff, because that doesn't lend itself to neat statistical models.
Austrian school, of course, stands apart from the mainstream, but well, it stands apart.
End result is that those who matter believe (sincerely, I think) that there is no structural problem, and "flexibility" will save the day. Most bulls (like Sebastian here) belong to that camp, I believe.
A very crude characterization is that the mainstream only looks at income statement & cash flows of the economy as a whole, and never at the quality of the balance sheet (a structural issue). This is right, until it goes all wrong. The puzzlement and the conundrums expressed are (for the most part), sincere, because their models simply don't reflect any concern for the balance sheet issues.
"A very crude characterization is that the mainstream only looks at income statement & cash flows of the economy as a whole, and never at the quality of the balance sheet (a structural issue). This is right, until it goes all wrong. The puzzlement and the conundrums expressed are (for the most part), sincere, because their models simply don't reflect any concern for the balance sheet issues.
Renter |"
Wow Renter....Brilliant...couldn't have said it better myself.
Cheers,
Benny already told Milton that they won't make THAT mistake again! I'm betting on a rate cut. Time to take some of those fat profits from Sebastian.
The central bank probably views the money stolen from the system by over-zealous bankers as the cost of progress so I wouldn't expect any tougher medicine than has already been administered. Benny thinks he earned his stripes by forcing them to the discount window. I think he is about to prove himself wrong. Better go with the 70s versus the 30s if given the choice though. Hopefully their actions in this cycle will be enough to end the ignorant tyranny of central banking.
Just for fun:
YouTube -
Cheers,
Ya that was good renter.
BTW I am MUCH stronger in micro-econ than macro but that shouldn't come as a surprise - I've run my own biz for almost 25 years. Close to failure a couple times and boomed other times. Somehow saved some money though even I'm not sure how.
I am to this day insanely focused on 'cash flow' as dc1000 can testify. I think the order of importance is cash flow, balance sheet and lastly income statement. The IS is by far the easiest to fudge & fake. Cash flow is hard to fake.
BTW I am way too small to fall under Sarbox but get why it was enacted... anyone who does their own books knows why these guys are bitching about Sarbox.
But boy do I ever agree with the statement that our masters don't know how shaky the structural part of the economy is. The base. If you walked offices & factories of all the companies I do you'd agree.
Regardless - the wheels haven't fallen off yet and having a 'shaky structure' is no justification for a cut. Not yet. When there is real pain - contraction backed by data - then maybe.
In an extreme situation therefore, Goldmans entire existence rests on the value of its Level 3 assets.
You need to add the assets of US treasuries to come to the right answer.
Repeat after me:
Goldman == US treasury
Goldman == US treasury
Goldman == US treasury
3"re: Anon - "Goldman Sachs issued a sell on oil today."
yup, those buggers are amazingly tapped in to decision making or - even - they ARE the decision makers
. Since a temporary hold is dollar bullish and so is bearish on oil ( all other things being equal ), what do they know that I don't ?
all part of the
Look, I dont want a rate cut now, just like I didnt want one before. Yet, we got one before, and the reason then wasnt the economy, it was the credit market issues. Seeing as now the economic justification is even more so, and the financial market issues are in a way worse, since they've gone on even longer without resolution and no real progress on any of the attempts at resolution.
Therefore, tomorrow, I'll be pissed again, but we'll get a big fattie rate cut just like last time. Heck, I said it yesterday, it will be 75bp.
Now, you might say it WAS the economy, because there is my favorite collapsing housing market steamroller bearing inevitably down upon us. So, what is so inevitable in July? Ya, I think so. Did Ben? Hmm. Maybe, maybe not. He surely must now. So now, we've got credit and economic issues, which means a cut is even more justified now than before. To this we add (or maybe I should say subtract) the inflationary issue, which is a growing threat...so maybe less of a cut or no cut. But that's inflation now and in the short term. If we dont cut, weve got recession, and we wont be fearing price hikes in a recession, or record high oil.
So, Im back at 75bp.
Regardless - the wheels haven't fallen off yet and having a 'shaky structure' is no justification for a cut. Not yet. When there is real pain - contraction backed by data - then maybe.
I hate it when Dryfly is right.
Not sure I agree Banker. If you think that somehow the housing market pain won't really make much impact, then yes, it's too early too cut. But my take is that housing will have a doubly painful and inevitable impact - on the real economy, which will hit housing prices that much harder, which will bust up the credit markets that much more. If this wasnt an issue, why exactly did we get a rate cut before? Cant see any reason one isnt justified now if that one made any sense.
The criminal class has taken over the entire U.S. gubbermint, the treasury, the fed, the courts, the banking system, etc.. They are going to do what they are going to do. They will tell lies to the sheep, who will believe the lies, and vote for more criminality. What are you gonna do about it?
I'm going with 50 bps. Ben's goal is to get the credit machine working again. If he fails, deflation will render him useless. He's probably already too late to stop it.
Go long on cash. And Twinkies. Those flippin' things last forever.
Arthur Burns? Arthur Godfrey, maybe.
Procter and & Gamble products are worth a few extra pennies. They put a spring in your step and a smile on your face. The toothpaste price increases will hold just a little longer than the airline price increases have been holding for the last few years.
Unfortunately, I was at the store tonight and noted that beer prices have been increasing. Now that's pricing power.
Montgomery Burns, on the other hand, is an ideal type which our leaders do not have the courage or strength of character to emulate.
OT- I'm taking the 750-775 visitors for CR at 2:00 P.M. tomorrow (FOMC). Don't know where the betting window is for the explosion of comments afterwards.
Here is another good read. I just get this feeling something big is going to unwind soon.
The FHLB Return. Or should I say Repeat? The more I think about this, the nastier it feels. [hmpf] "Funding flexibility" indeed.
On beer prices: Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor (via Blogger: Page not found
Cant see any reason one isnt justified now if that one made any sense.
Who made that claim about the last one?
Perhaps the data the Fed gets (before it is massaged and deemed OK to be released to the masses) is much worse than we are led to believe. I also wonder how much the Fed feels it is simply playing a confidence game.
Given the reaction from the US$ (and commodities) from the last 50 basis point move, cutting another 50 basis points would certainly confirm a large amount of fear on the part of the FED regarding the current situation.
Beer prices! Now they have gone too far! I demand the Fed raise rates immediately!
Topher, the Naked Capitalism (from Bloomberg) article you linked to is extremely instructive. Essentially, mortgage lenders have borrowed huge amounts short-term ($163B in two months!) at below ABCP market rates through the FHLB's, which are themselves able to borrow cheaply from investors because they are perceived to be backed by the US gov't.
Okay, so the FHLB's demand AAA bonds as collateral. The fact remains that the mortgage lenders would be BKing in droves were they not borrowing at cheap rates guaranteed by taxpayers. And if their collateral proves not to be truly AAA in quality, or if the RE market continues to deteriorate and they go BK despite the FHLB loans, you're going to see the mother of all taxpayer-funded bailouts. Trillions in GCE debt will have to be reimbursed by the USG.
But that is how the Fed avoided a direct bailout of the mortgage industry. And, this strongly indicates that the Fed will keep cutting rates. It isn't about the economy at all. It is about the credit markets, which are being gradually sucked into the quicksand of RE.
Great link, thanks!
I sure hope CR/Tanta does a thread on this FHLB bailout; it deserves a full slate of comments (unfortunately the rate cut news frenzy will probably drown this out).
Isn't this far more significant/nefarious than M-LEC?
Link to Charly Evans, new president of the Chicago Fed, September speach at the University of Chicago. Outlines his perspective on the feds mandate and responsiblities with respect to increases or decreases in the fed funds rate. Interesting read.
- , Federal Reserve Bank of Chicago
Goldman going short on oil is important and moves me from the 25bps camp to the 50bps or no cut at all camp. These buggers know something, and are positioning themselves to capitalize on it.
A couple thoughts on the stock market irrespective of today's fun and games:
The patient is on the gurney. The code blue team just hit him with the volts to kick start the heart. Do you dial it down or just standback? No, you hit him again.
1%
Isn't this far more significant/nefarious than M-LEC?
Look forward to hearing from the industry pros, but sure seems that way to me, just because of the opacity and the notion that these guys can shop around for who they want to be "regulated" by. Then there's that "perceived" federal guarantee of FHLB debt. What's the technology and the cost of maintaining that "perception?"
I'll bet it explains a lot from late summer, though.
Apropo:
Americas financial regulation needs an overhaul (FinTimes)
"Anonymous" as in pd130.
Perhaps the data the Fed gets (before it is massaged and deemed OK to be released to the masses) is much worse than we are led to believe.
Well, last time one thing the BoG might have known that most of us didn't was the amount of skulking around in FHLBistan that was going on. (Something about this is really getting my goat.)
Goldman Sach front running FOR the Fed--saying sell oil to drive the speculators out, drive the price down.
Because of the "sell" advice, when to rate cut is announced there will be no immediate upward spike to $100/barrel (which the consumer would notice).
Instead, prices may fall or stay steady immediately after the Fed cut, thanks to Mr. Paulson's company.
Economic tipping point-
adjusting my forecast to longer and more protracted recession than previously thought due to credit conditions worsening over coming months/years. Bank and IB balance sheets to be under stress for the next couple years or more. The August credit crunch will become a blip and the period directly ahead will be extremely difficult for the average consumer and overleveraged corporate balance sheet. Declining revenues and increasing defaults are going to be commonplace in the coming months.
Consumer spending contraction will be significant due to much more limited access to credit, corporate defaults in the weakest credits will surpass many of the most pessimistic forecasts as available refinancing options disappear. Equity issuance will become the norm at likely inopportune times due to depressed equity prices.
An imminent commodity collapse is likely in the cards shortly due to the realization that recession is inevitable. This will pose significant problems for the hedge fund community due to the concentration of exposure. This will aide the consumer and provide the reissuance of optimistic forecasts of a consumer rebound, only to prove to be off base due to a consumer that is far more stressed than most have the ability to grasp.
Tough period ahead.
I predict a 25bp cut. 50 is too risky. They have to give the appearance of helping homeowners for political reasons.
core-cpi is soon going to be cpi ex. food, energy, health care, education.
One euro equals $1.4453
...because their models simply don't reflect any concern for the balance sheet issues.
Which would explain why they've tried to attack solvency issues as if they were liquidity/cashflow problems.
When the roof has some holes in it, I patch the roof or replace it... When the government gets some holes in their roof, they knock down walls(rate cut).
Listening to the talking heads this morning I am struck by how LITTLE the last .50 cut changed anything. The exact same remarks are being made: that they might as well make a .50 cut now rather than have to do it later, that a .25 cut will help them feel good even if it isn't "needed", that a .25 cut will convince that the fed is "keeping its eye on the ball," [although nothing is said about whether such a cut would convince companies to make capital investments in the US, or simply raise wages for their workers - of course that is because it wouldn't!]
I haven't heard anybody ask why the last, unexpected, much higher cut of .50 accomplished so little. I thought that was definitely a "one and done" cut to tell the market that they were making a big concession and expected them to respond to it.
Therefore, I think there will be no cut. The fed needs something in its arsenal during the election season. They must be very frightened that, if this cut is made, and, say, oil goes through the roof, that they will become a focus of election-year malignment.
...because their models simply don't reflect any concern for the balance sheet issues.
Which would explain why they've tried to attack solvency issues as if they were liquidity/cashflow problems.
jim a | 10.31.07 - 8:14 am | #
---Let me correct that. They've attacked liquidity/cashflow problems as if they weren't CAUSED BY solvency questions, in ways that did NOTHING to aleviate questions of solvency.
Big rate cut coming.
The US federal debt load is around $9T.
No end in sight to ever increasing US borrowing.
Half the debt is helded by extra governmental entities T Bill holders like foreigners and internal "investors".
The half in intragov debt is mostly social security, medicare, civil service retirement and military retirement, a little bit is accrued FDIC insurance premia.
None of the holders of US federal debt will be affected by paying the inflation tax.
At least not in Bernanke's watch.
50 bps this time, and each FOMC until Ben pays me to borrow money.
As far as macro, I wish I could get a grasp of this organism known as the consumer.
I have my parents and their contemporaries who (despite their whining) are flush with both cash and security. My dual income friends who make over 6 figures and still shop at lawn sales and my neighbors who would be bankrupt were it not for HELOC's and balance transfers.
Is it possible for 3-4% of the population to drive the economy over a cliff?
Bernanke is opposed to deflation, will prop the price of oil, corn and gold!
50 bps.
"Is it possible for 3-4% of the population to drive the economy over a cliff?"
No, the top 1% will do it and enjoy the ride.
someone may have answered this before, but
what does dropping rates do to the value of the derivative positions held by the banks/IB's?
for instance: let's say Lehman Bros has $10B worth of CDO CDS and synthetics that they "can't price" at today's 4.75% interest rate.
Does the Fed dropping rates by 25-50 bps change the worth of those securities at all??? what about 100-300bps?
or does this drop only improve things such as prices/rates GOING FORWARD for various securities and the ABCP market????
sorry if my question is dumb or poorly worded... I still just don't get if a 1% FFR would magically make the garbage that's already on these balance sheets worth more, or if it instead allows the companies to make money going forward to compensate for their past losses.
tia
A rate cut will achieve nothing.
Q3 advance GDP 3.9%. Strongest in years evidently.
so Q2 was 3.8%, and Q3 is 3.9%... and yet we will get a cut.
sigh.
whole country is turning into goldman sachs. if you believe the stats, US has been growing 4% in Q3. of course, if you believe that GDP price index went from 4% in Q1 to 0.8% in Q3.
GDP number in higher than expected at 3.9% (3.1% survey) and Core Price Index also higher at 1.8% (vs. 1.5%). So economy still looks ok and hints of rising inflation but this will have no impact on coming cut today.
Brain...in...conflict...PAIN...HIGH
GDP...HIGH...Oil...HIGH...need for rate cut...LOW
(distracted by fundamentals again!)
GDP 3.9, deflator 0.8.
How real is either number?
Maybe the idea is is that low inflation allows the fed to cut at the same time the 3.9 can be trumpeted as high growth.
I agree with Banker, there seems to be some real schizophrenic thinking going on here.
First, most of the posters (especially the new recruits) seem to think we are headed for a very hard landing. Second, many of the same people seem to feel the Fed shouldn't respond to the very downturn they themselves see as inevitable.
Which is it?
As has been pointed out, the FED has had plenty of chances to disavow the market of its expectations for a rate cut, but chose not to. To Tim Duy, this just means that Bernanke needs to prove he won't be led by the markets. I guess, it's an example of tough love, like teaching your kid to swim by throwing him off the dock.
I'm a card-carrying, charter member bubble head and am short large parts of the market, but dumb is dumb.
The Fed didn't ease rates in 1929 and Congress was worried about budget deficits.
If you think things have the potential to turn really ugly, as I do, then, of course, the Fed should ease.
ADP:
Nonfarm private employment grew 106,000 from September to October of 2007 on a seasonally adjusted basis, according to the ADP National Employment ReportTM. The estimated change in employment from August to September was revised up 3,000 to 61,000.
Octobers increase of 106,000 marked an acceleration of private nonfarm employment after three months (July through September) during which the average monthly change was just 43,000.
The decline in the dollar means little to the ordinary person. A trip to Europe is in few people's future.
The only way that the ordinary person is tied into international prices is through oil. That is why, as I outlined above, that Goldman may be attempting to drive down oil ahead of the rate cut.
A falling dollar causes oil price increases immediately. A sell recommendation can confuse the market for a week or two, and lessen the effect of a falling dollar.
The other effects of falling dollar will not become apparent for a few months.
That's what we are dealing with, the Fed trying to buy time, a few weeks at a time.
An understated gdp deflator leads to an overstated gdp number. Both numbers seem so far divergent from reality that I would expect both to be revised significantly, and gdp growth is actually running somewhere closer to 3%. Still, the case for a rate cut today is getting shakier by the minute, though the Fed had every opportunity to manage expectations down if they didn't plan on cutting 25bps today.
the whole "shizophrenic" point of view you refer to is simply about the role of the central bank. it's not to be a recession combatant. it's to preserve the soundness of currency. US >deserves< to go through the recession, and it will, but the Fed's recklessness will cost US more in the long run. think $ seignorage, not the x-mas bonus.
For those upset with the increase in the price of beer:
I heard on the radio up until this season there has been an over supply of hops on the market. Farmers switched from hops to other more profitable produce/grains. There is no longer an over supply of hops, hence the price increase.
to EZrider: it ain't matter, cuz if beer prices go up, you can switch to low malt. low CPI everybody!
Quarter-point cut today. Credit mess is still unraveling and incremental cuts will come.
I am expecting a 0.25 cut and a sell off of the markets this afternoon. Since I am working, I will change from net long to net short index futures at lunch. First day of the month is bullish about 80% of the time. So, no matter what happens this afternoon, I will go long futures after the close for Nov 1st. I am expecting home builders to start falling again, unless we get a 0.50 cut.
CNBC has been announcing all morning that the market has priced in a rate cut. Therefore, the FED must cut rates. Obviously then, the market controls the FED.
Nice to know who is in control.
You know they are sitting around the table and looking at each other and saying wtf let's decide by eeny meiny moe
the gdp numbers are obviously confusing.
business spending on equipment and software up 5.9%? wages and labor markets tight? imports increasing?
3.9%?
confused.
i realize the fund is 'forward' looking but how do they cut rates in the face of above trend growth, tight labor markets, rising wages, increased capital exp, etc?
The Last Days of the PetroDollar
Daily Kos: The Last Days of the PetroDollar
excellent diary !
October Chicago PMI 49.7% vs. 54.2% in September
--
We need at least one cooked up number to support 50bps cut. We will revise that number later but the rate cut stays.
business spending on equipment and software up 5.9%? wages and labor markets tight? imports increasing?
Welcome to my world.
I'm on the verge of shutting down two of my three best customers because we can't keep up with demand. Add to that material cost increases we need to pass along and can't get due to 'resistance'... and yes both companies are expanding and adding new lines DOMESTICALLY.
Its the dollar... they are making more here and buying fewer components offshore. Not much of this product exports but it does face substitution competition from imports... the imports are increasingly less competitive due to dollar weakness. if the yuan shifted... we'd be swamped.
Understand these products don't have a large labor component so 'cheap labor' isn't a big factor. Raw material, energy & capital cost are biggies though.
I don't see how in hell the fed can even entertain discussion of a cut right now. I understand why they should cut under certain situations but not now. IMHO.
October Chicago PMI 49.7% vs. 54.2% in September
I don't trust the Chi PMI as far as I can throw it - which since its not a real 'thing' isn't very far.
49.7 isn't that different from 45 or 55 IMO. Says its so-so. Good, I like so-so.
YouTube -
Ron Paul mentioned Austrian Economics on the The Tonight Show with Jay Leno last night.
The end is better than the beginning, but its all good.
Just something different to watch today - but it does have an economic tie and hence my posting it here.
Here is the thing, if these FHLBs (with implicit guarantees) are willing to accept home mortgages as collateral for loans at 4.9%, THEY SHOULD BE MAKING THE LOANS DIRECT TO THE HOMEOWNERS. Why should the American taxpayer be forced to go through a middleman to have access to these government subsidized rates?
Why should the American taxpayer be forced to go through a middleman to have access to these government subsidized rates?
Especially since the value-added from the middleman is an extra-thick layer of bullshit. This used to have value as plausible deniability, but now fulfils the normal bullshit function, which is to obscure and contaminate everything it touches.
"I don't see how in hell the fed can even entertain discussion of a cut right now."
I know, poor dear. Have a nap, and a nosh.
Yes, many bears here expect pain to come. No, we don't want a rate cut. These are not conflicting views. A rate cut WILL NOT HELP.
Cutting rates at this point is like giving money to a starving crack addict because he is starving. Yes, it is sad that he has no money to buy food, but what will he do with the money you give him? He'll use it to buy more crack, not food, just as any cheap money from lower rates will be used to lever up more Ponzi schemes and give the rich bigger bonuses instead of doing something about that gaping abyss that is the future of the nation's economy.
Bring the pain now to the banks, hedge funds, etc. before we're all living in "Bernanke Village" tent towns, competing for the honored position of Wal-Mart greeter.
What do those bodacious GDP and employment reports do to our certainty of recession?
I'm perplexed.
Renter said: "...End result is that those who matter believe (sincerely, I think) that there is no structural problem, and "flexibility" will save the day. Most bulls (like Sebastian here) belong to that camp, I believe.
A very crude characterization is that the mainstream only looks at income statement & cash flows of the economy as a whole, and never at the quality of the balance sheet (a structural issue). This is right, until it goes all wrong. The puzzlement and the conundrums expressed are (for the most part), sincere, because their models simply don't reflect any concern for the balance sheet issues."
This might be an accurate characterization of some bulls, but it isn't for me, on a couple of points.
First, I don't think the bears (or not-so-knowledgeable bulls, for that matter) really understand just how far and for how long balance-sheet quality can deteriorate before it actually shows up in stock-market behavior or economic growth. One of the reasons I've been so (justifiably) bullish is because I have a handle on the timing of stuff like this, learned from a great many miserable experiences being on the wrong side of bull markets.
Second, I don't believe the balance-sheet quality is as bad as is generally thought.
Take SP500 earnings for example. When the SP500 peaked in Q1 2000, TTM as-reported earnings at the time were about $51/share. Today, though, with the index at approximately the same price level, TTM earnings are around $84/share. This stock-market rally since the October, 2002 low has been driven mostly by rising earnings and not PE expansion (speculation).
Sebastia
Interesting comments in Barrons regarding the Fed's priorities:
For the Fed, Falling Houses Trump Falling Dollars - Barrons.com