I am literally stunned.
Let me see if I can collect my thoughts.
First, the notion that the Federal Government has made the world safe again by offering to absorb all the toxic debt out there in an RTC-style entity is absurd. (Note: Resolution Trust Corp = the government entity that ate all the bad S&L debt back in the 1980’s). Assuming this idea even gets off the ground, all that will have happened is that private debts than have gone sour will have been transferred to the public.
Will the debts be reduced? No, just transferred.
But a number of $500 billion has been bandied about as "the right size" to get the job done.
My friend Gunter has a different view (he works for a major financial institution overseas):
[quote]
Hello Chris,
I have not seen a number yet but here is my quick and dirty calculation
Worldwide Credit Losses & Write Downs as per 9/19/2008…………USD 516.7 bln
Capital Raised…………………………………………….USD 362.8 bln
Capital Shortfall………………………………………….USD 153.9 bln
For this calculation I assume that financial institutions are leveraged by a
factor of 10. In reality I think the multiple may be even
higher.
If we assume that equity capital markets for financial institutions
remain closed the existing capital shortfall of USD 153.9bln requires the sale
of (mostly troubled) assets in the amount of………………….USD 1.539 trillion
Assuming that an estimated amount of USD 1.300 bln in total credit losses and
write downs will hold (risk is on the upside in my view) there are at least
another USD 783.30 bln (1.300 minus 516.7) to be realized which will result
in another……………………USD 7.833 trillion
and in total
USD 9.372 trillion
to to be sold to:
– government(s)
– dislocation investors and/or
– remaining sound financial institutions (if any)
Let me know what you think and feel free to use it on your blog.
Guenter Leitold
www.highyieldblog.com
[/quote]
It is against this (possibly very) conservatively stated $7.8 trillion shortfall that we need to assess the $500 billion US bailout.
Also we had:
[quote]
WASHINGTON (Reuters) – The U.S. Senate on Wednesday overwhelmingly approved a $612.5 billion defense spending bill for fiscal 2009, including $70 billion for operations in Iraq and Afghanistan.
[/quote]
So no obvious sense of spending restraint showing up in DC yet. I guess the mood down there is that we can have a $600 billion + military budget and a $500 billion bailout and everybody will be fine with that. No sense of priorities, sacrifice, or tradeoffs yet. It’s still a version of "Yes, I’ll have one of everything" at the old taxpayer buffet table.
And:
[quote]
The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.
To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
[/quote]
And:
The SEC extending the ban on short selling to 799 companies. This is going to backfire on the SEC, big time. Short selling has been used for many decades and is an embedded part of many trading strategies. Removing short sales will certainly do two things; (1) provide a ‘pop,’ as short sellers cover their positions and less selling pressure comes into the market, and (2) assure that the next bottom will be far lower, deeper, and longer than past bottoms. Short covering is the #1 reason that bottoms are found. Remove that, and the bottoms are less crisp, more like a boggy pond than a concrete pool.
And:
[quote]
Sept. 19 (Bloomberg) — The U.S. government will set aside as much as $50 billion to temporarily protect investors from losses in money-market mutual funds caused by the meltdown of financial markets.
[/quote]
And:
…I could go on and on. The main point is this: Rules are being broken and changed so fast that I cannot possibly analyze them all fast enough.
And the bottom line is this: The US has just announced close to three quarters of a trillion dollars of new spending/borrowing, while the Federal Reserve is now accepting everything from auto loans to commercial paper, to equities, to Fannie debt.
The dollar *should* be getting killed here. It is not, yet, but markets have a way of settling themselves out, and I have little doubt about the long-term direction of the dollar, given everything that has happened this week. In my assessment, this entire stock-market propping of the last 24 hours is a fake rally designed to buy some time.
by joe2baba