Comrade Bagholders,

No more messy hastles securing your Fed loan now. Just cruise up to the window and get yourself a spiffy new Fed Cred credit card.

Nostrovia,

OK, can someone explain this to me?

Fear about MM funds has dried up capital normally available to invest in CP, correct? Driving up the cost of borrowing short term?

Then why are these higher costs not reflected in currently pathetic MM rates? If MM funds paid higher yields, they would attract some capital back by compensating investors for the risk. More capital would eventually bid down rates again.

Isn't this the way it's supposed to work? Why isn't it happening?

Iran fighters force down US aircraft?

headline on CNBC. anybody know anything?

FEDUP writes:

This isn't legal, but then what is nowadays.

I was wondering the same thing, if this was even legal for the FED to do. Of course, even if it is, who's going to challenge them on it.

this facility should encourage investors to once again engage in term lending in the commercial paper market.

Instead, investors will hoard even more cash.

Hm, that's odd. Does anybody else hear the sound of helicopters?

Comrade Bagholders,

OK so the Fed is essentially in panic mode, and this is somehow good news causing futures to rise.

I'm dumbfounded.

Nostrovia,

FEDUP & Jerry --

The Fed can make any loans they like to any counterparties they like.

This is just as legal as the Fed itself (ahem).

Press have finally caught on to the Treasury (illegally) rewriting a tax statute, 382(

CNNMoney.com: 404 Page Not Found

Senate aides said they have questions about whether the Treasury was authorized to lift tax-loss limitation rules in bank merger transactions, or whether a change in law would be needed.

The change in the loss rules for bank mergers is one of a series of tax policy changes the Treasury has made in recent days in an effort to shore up the stressed credit markets.

Basically if company a goes from under 5% to above 50% ownership of company b under 3 years, they can't apply company b's net operating losses against their own capital gains.

Shorter version: The more money a company loses, the more money it is worth to a profitable company. WFC would have been acquiring tax credits for maybe 25¢ on the dollar -- or a treasury approved measure to selectively cut taxes for financial corporations -- something they are not legally allowed to do.

This smells funny because Paulson has had to recuse himself from meetings regarding Wachovia/FDIC because he is buddy-buddy with the Wachovia CEO who recently worked at the Treasury

Pentagon is denying Iran story...FWIW

Mark Bialkowski --

What happens if the companies that take up the Fed can't pay up when the paper comes due?

Well, commercial paper is such short-term stuff that it almost never defaults.

But if it did, then yeah, that money is gone; released into the wild, as it were.

I actually believe "Helicopter Ben" is not going to allow a deflationary depression on his watch. Unfortunately, there are other kinds of depressions.

From the press release:
By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market.

Dawg on the street translation:

By transferring much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations to US Taxpayers, this facility should encourage investors to once again engage in risky term lending in the commercial paper market using other peoples money to make loans they have demonstrated they are unwilling to make with their own.

Nemo writes:
FEDUP & Jerry --

The Fed can make any loans they like to any counterparties they like.

This is just as legal as the Fed itself (ahem).

Touche.

may not have been flying in Iran, but the closest airstrip for emergency landing may have been in Iran so had to use it or crash and die. who knows, but we'll find out soon.

hahaha. Yeah, that's likely. Let's see... land in Iran and cause international mayhem not to mention giving Iran a new functional warplane... or eject and lose the plane to a crash. You do the math.

I'm shocked, SHOCKED I tell you to hear that a US plane was in Iranian airspace.

What will they do for tomorrow's bailout?

Report of how Paulson plans to restructure the mortgage pools brought under the TARP

http://www.peoriadefense.com/photo_host/IHaveAlteredthePool_1321A/alteredpoolbaby_3.jpg

** Must Read **

Stealth easing
Jesse's Café Américain: Will the Fed Cut Rates by 75 Basis Points? They May Already Have.

or is your thought that this new CPFF will crowd out private investors due to the CPFF using below-rate CP rates?

Why doesn't the Fed just cut the interest rate? I wonder why they are protecting it THIS much.

Matt writes:
Why doesn't the Fed just cut the interest rate? I wonder why they are protecting it THIS much.

I think the rate cut is the last "last stand"...then the hoards breech the gates...

Bill writes:
I wonder how long this little bounce will last (hours or days) ?

Not much of a bounce is it? Possibly minutes.

Why doesn't the Fed just cut the interest rate? I wonder why they are protecting it THIS much.

It won't work. The "pushing on the string" problem The Fed has offered tons of liquidity to many players, but those players are not then using that liquidity to lend again. they're hoarding it.

so the CPFF may actually DO something, by bypassing the banks and thus the money gets where it's really needed on Main Street.

the path to monetization may have begun.

Don't fight the power of the "press".

(comrade) tj & the bear-

i'm not a complete moron; i went 100% cash over a year ago.

i tend to dismiss a lot of the fear mongering on here, as (IMO) it is pretty extreme. dont get me wrong, lots of VERY intelligent analysis here, thats why i lurk.....but the colander heads tend to dominate the tone.

that said, i honestly am starting to get worried......

There are two words to explain the Fed action this morning: California and Massachusetts.

Hmmm. Frank is from Mass. Is this bailout going in a full circle, or am I being too suspicious?

In any event, I think the fed has already accepted these loses as inevitable. This new scheme, like the others, is just a way of reflating the system without looking like Zimbabwe running the printing presses.

Stealth monetization.

Well, nothing stealth about this if they admit the money is coming from the treasury.

It's outright in the open monetization.

What happens if the companies that take up the Fed can't pay up when the paper comes due?

What happens when companies create commercial paper only because they know the Fed will buy it? The Fed is financing even more malivestment, unsecured, by deadbeat companies.

People need to stop selling into the rallies to make their margin calls.

This is unacceptable.

The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

That's the money shot. We're printing, no ifs, ands or buts. I don't want to hear about roll overs either. That massive increase in the allowable national debt is ALL that you need to know. The rest is financial gymnastics between central & commercial banks.

If Paulson wasn't so stubborn, he would have started issuing long term debt. look at this chart

http://img389.imageshack.us/img389/4609/picture1gj3.png

from: http://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_ann2007.pdf

That was fiscal year end 2007. Since then the Treasury has dumped another, what, $600bn in to the short end of maturity?

Paulson is being pennywise by issuing cheap short term debt, but he is being pound foolish because it is destroying the lending market

Unacceptable, but not unexpected.

There's an awful lot of leverage out there that we can't squeeze back into the tube...

True... but if they'd just hold off a bit they'd be able to sell into a market that's 500 points up, not 150 points up.

Instead they go and ruin it for everybody else.

It's also possible that this was a bunch of disgruntled US investors looking to park monies in the Teheran bourse!

More intervention in the DEBT market more the Scam Market goes down. And rightly so. There is no way to avoid depression after bankers have misbehaved like they have during 2002-07. Greater the misbehavior of bankers worse is the depression. It is that simple.

Aren’t Scam Lovers born-and-bred dopes?

It is the debt, Stupid!

Jas

I suppose this could work if companies that take advantage of it manage to stay afloat...

OK, serious reply...

Suppose this does work. Suppose this keep some companies afloat that were having problems getting funding. What happens to those same companies if the products (or services) that they supply are not being consumed because the consumer has locked up and quit buying ?

Other than my own observations, I have some minimal anecdotal data, that this is actually happening. Ever since GWB did his Thursday night 'call your senator' speech, the US consumer has stopped spending (for anything other than essentials).

Angry Saver:
I agree with you. However, it is not monetization unless the CP isn't paid back, otherwise it works more like a Repo.

if every firm got into the CPFF and they all paid the money back there is no monetization.

"By eliminating much of the risk..."

I stopped there. The free markets are doomed.

Mark

It's mostly a Washington problem - all the various Iranian political factions agree on the need to improve relations, they just disagree on the specifics.

If it's what I think it is, then Cheney - and McCain - just got blindsided.

if every firm got into the CPFF and they all paid the money back there is no monetization.

Don't look at it in isolation. We increased our allowable national debt for a reason.

Mains Street has enough debt to deal with and they do not want more. This is all about Zombie companies.

Fed lays out details for when it will make short-term loans available to struggling banks

To help ease credit stresses, the Fed announced Monday it will provide as much as $900 billion in cash loans to banks. Most of the loans are for 28-days and 84-days. Some are shorter -- 13-day and 17-day loans.

It's a loan to banks -- solvent or not...

Thus far, I still have not heard a convincing argument as to why the CPFF is horrendous idea.

as opposed to the TARF which I strenously opposed, I find that the CPFF may actually do what it's intended to do.

Sure, there are going to be crappy companies that stay afloat due to the CPFF. And it could in theory crowd out private investment.

However
-the CP market was under extreme pressure anyway. the private market is saying they want nothing to do with it
-the CP market IS the real economy. This isn't some esoteric financial hoobygooby. A firm unable to roll their CP may not make payroll. Imagine if GE couldn't meet payroll.
-a lot of GOOD companies will be helped by this.
-we don't have the TIME to treat the CP market as it should be dealt with.

Now obviously, the big question is
-how do you keep the CP market from growing since it will clearly be offering below market rates
-how do you slowly unwind/disentangle the CPFF from the private CP, and when to do it.
-how do you decide who gets the CPFF and who does not. (this is the biggest problem IMO).

but I believe failure of the CP market could be death to our economy. Obviously it does nothing to address the credit market problems... but it keeps GOOD BUSINESSES (maybe your own company?) afloat for now.

we will have enough failures to satisfy everyone's needs with or without the CPFF

I agree with you. However, it is not monetization unless the CP isn't paid back, otherwise it works more like a Repo.

if every firm got into the CPFF and they all paid the money back there is no monetization.

Based on my understanding, whether it's paid back or not has nothing to do with whether it's monetization. Monetizing debt is simply when the treasury issues issues its own debt to buy the debt of others.

When Japan buys its own debt that is called monetization, even though it is assumed they will pay it back one day. Why would CP be any different?

Rob Dawg writes:
There are two words to explain the Fed action this morning: California and Massachusetts.

I wondered the same thing - btw what states do Pelosi & Frank come from? Quid Pro Quo anyone?

Yen has been a real mover. Getting within range of that 100 barrier again.

Don't look at it in isolation. We increased our allowable national debt for a reason.

Angry:
you are mixing two different idea.

1) is the CPFF in and of itself monetizing?
2) is there monetizing overall?

answer to 1: the CPFF is not monetizing so long as the CP paper is paid back by all parties. That which is not repaid is monetized.

answer to 2: overall stealth monetization is likely occurring, but that bill has yet to be tallied. but that overall monetization has little to do with the CPFF (except for what I've referred to above)

What the f are waiting for? Either let it go up or go down. I can't hit refresh all day!

The Fed is just reaaching for a "more orderly form" of chaos. Just to cover the election.
Anonymous | 10.07.08 - 10:19 am | #

More orderly chaos = paler shade of gray...

Today's Rock Blogging in celebration of the new CPFF!!!

YouTube - Oingo Boingo Dead Man's Party

Oingo Boingo - Dead Man's Party

ac:
you bring up good points, and perhaps the problem is the loose definition of "monetization"

Perhaps I can invent the term "net monetization" instead?

Mel writes:
I don't think a lot of this would be considered legal by past Supreme Courts, but...
Mel | 10.07.08 - 10:24 am | #

One of the unintended consequences of putting more 'literal reading' and 'original intent' judges on the bench is that if something isn't expressly prohibited by the constitution or outlawed by congress then it is likely 'legal' & allowed. My guess is everything we've seen so far fits under that umbrella.

Just sayin'...

Actually the risk is shifted to the Treasury since it is guaranteeing the loans.
Dope Brontide | 10.07.08 - 10:33 am | #

All roads lead to the taxpayer - ultimately.

Felling any better about it now?

Please all, stop with the useless "zombie corporation" analogies, they do not hold well.

some of these companies throw off huge amounts of cash and are very productive. Until now, they used the CP market as it was a lower cost way to fund operations compared to other financing options.

now clearly there is an argument that they never should have gotten into the CP market in the first place... but it's not just a bunch of 'bad companies' that are using the CP markets.

some of these corps could in theory unwind themselves from the CP market given enough time, using the cash that they raise in the interim. there are nearly 1700 companies that use the CP market, clearly you don't think that ALL of them are useless deadbeat zombie companies that don't make anything?

again, MY goal for a CP market solution would be for the CPFF to work in a SHORT TERM process which would allow GOOD comapnies to have the operating capital to continue operations. during that time the companies could raise their capital outside of the CP market, and then eventually be weaned from the CPFF.

of course, the problem with this is HOW to get the companies off the CPFF teat. Because clearly the CPFF is going to offer below market rates, so a company would be crazy not to continue using the CPFF. But if there was some mechanism to that the company would know that they have XXX many months before they're booted off the CPFF then they could use all free cash to build up a rainy day fund for when their CPFF rights expire.

but these arguments of "let the companies die, they're zombies anyway" is REDICULOUS. all IMO of course.

dryfly, regarding the courts and enforcement, personally i'm not hopeful.

all that happens is a report without enforcement. take today's -

Federal report said to question SEC's impartiality

REG - Financial Week

The special debt issued by the treasury will NEVER be retired.

This is not assured. Now don't get me wrong Angry Saver, I totally agree that IN THE END there will be monetization through the CPFF and the other various "facilities". But that bill is not yet tallied.

and it is theoretically possible that the CPFF will be retired (eventually)

Interest paid to the CPFF should not be tax deductible. That'll wean them off the Federal teat in short order.

I have no doubt that the inflationary forces will win, and when they win, it will be messy.

But I don't see it happening for a few years. Any thoughts?

I suspect the middle class will take the hit as soon as inflation kicks in - and it may indeed be a while. That's what really bugs me.

With wealth comes responsibility. Our wealthy want guarantees and free lunches.

What a sham.

I suspect the middle class will take the hit as soon as inflation kicks in - and it may indeed be a while. That's what really bugs me.

What a sham.
Angry Saver | 10.07.08 - 10:42 am | #

Agree w/ all three points...

and it is theoretically possible that the CPFF will be retired (eventually)

At this stage of the cycle you can forget theory and forget free market principles.

Those only apply to the rich and even then they only apply on the upside.

Ride the bubble! Buy UST STRIPS!!

The biggest UST bond bull in America (for 18 years),

Jas, I've been with you on this for years. But I'm slowly legging out of my intermediate term treasuries.

Thats the only TIP I can give.

ahh, long term forecasting discussion again.

it's a very flexible battlefield, but i'm currently thinking this order of change in the US -

deflation of a large percentage of highly leveraged derivatives.

inflation from residual liquidity input.

confiscatory deflation of individual assets, per argentina

or hyper inflation from residual liquidity and stupid FED tricks, inserted in the latter part of that timeline.

3) that everything the govt does is by definition evil (it isn't)

Not everything. But bailing out the rich at the expense of the middle class is a travesty. At this point, > 50% of Americans are wards of the state. Think FNM, FRE, Social security, etc.

Now that the sham has been exposed, I thoroughly expect even bigger welfare state.

Economic tyrannny.

The evidence simply doesn't support the notion that the Fed is better able to price risk than the market. Quite the opposite in fact.

ac | 10.07.08 - 10:39 am | #

The market is still pricing risk - with its feet... the 'bid' side won't play until the 'ask' side matches the risk premium... so until that happens the Fed will be the lone bidder.

That can't last for long in a trillion plus dollar market - either the risk premium walks back down OR the Fed caves. Anything in these actions making you believe the risk premium will walk down by itself? Anything there likely to improve the performance & quality of the existing CP?

Next step - gov't insuring CP quality (like FDIC) to 'force' risk premiums back down (by US gov assuming instead)?

@ Margin Call of Cthulhu | 10.07.08 - 10:52 am | #

Agreed.

Dope Brontide:

that is a very good point. It would be interesting to see who 'needs' the CPFF.

I'm not enough of an expert to know what's going on day-to-day in the CP market.

If it is ONLY "bad" companies that need the CPFF then I withdraw all of my comments about supporting the CPFF.

does anybody have any sources?

I know one of the big firms needing the CPFF was GE. I'm not sure if we consider GE a "good" company or a "zombie" company.

Anything in these actions making you believe the risk premium will walk down by itself?

Absolutely.

The debt destruction occurring will free up real capital to pay off debt in the future, thus reducing risk premiums over time providing the debt markets behave rationally (and right now I would say they are behaving more rationally than they have in a long time).

In fact, long-term nobody has come up with a reasonable suggestion as to how it can happen any other way.

It's just a matter of how that debt destruction occurs - inflation or default.

Either mechanism is toxic to lenders and the credit markets, because both result in a loss of real capital. Either mechanism will drive lenders away from the markets and create further credit driven economic problems.

To me it seems like the Fed here is trying to figure out a way around the laws of physics.

time for another market tantrum to coax out the global rate cut ?

Jas and other bond bulls:

Don't you think it is getting a bit late in the day to be buying government bonds at this point?

Just wondering...

Will it be dropped from helicopters or what? I'm confused.

Margin Call of Cthulu --

but if Californian cancer victims want to smoke weed, well then, we suddenly discover that this is an essential area where Federal policy objectives must dominate state interests

Clarence Thomas dissented on that opinion, incidentally. His dissent was a single paragraph that said, roughly, "if it's not interstate and it's not commerce, I do not see how it can be interstate commerce".

ac writes:
"To me it seems like the Fed here is trying to figure out a way around the laws of physics."
They are trying to tightrope down the middle, I think. They went the inflation route at first (rate cuts) but found it politically difficult because the Euro nations didn't follow along. So now the other path... which hammers the Euro nations. Flip, flop.