This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.
Across the Curve is an excellent site, which I look forward to visiting every day, but today’s postings were extremely alarming. After all the agony of the Fannie Mae/Freddie Mac bailout, the euphoria on the markets lasted less than 24 hours, and ATC points out a number of reasons why this is so. First and foremost, there seems to be a gloomy sentiment forming that the Treasury has employed all the most powerful weapons it has in combating the credit crisis, and will now be consigned to the sidelines to watch and wait for whatever else may come along. And candidates are already queueing at the door. Lehman, of course, is potential casualty number one: much-exposed to subprime-related writedowns, it announced huge losses not long ago, and recently has been under fire because it is experiencing difficulties raising the capital it requires to reconstruct its tattered balance sheet. It had been in discussions with a South Korean concern, but those negotiations broke off, and, according to ATC, the Fed and Treasury, having just assumed responsibility for Fannie and Freddie, barely caught their breath before being forced to recruit potential investors on Wall Street to prevent Lehman from suffering a Bear Stearns-style meltdown (Lehman shares fell some 40% today); ATC speculates that the tipping point may be reached when a counterparty refuses to do business with Lehamn. But ATC says nobody on Wall Street is in a position to save Lehman except J.P Morgan Chase and Goldman Sachs, and JPM already got hooked into the Bear Stearns deal.
Meanwhile, shares tanked across the board today, and, as ATC notes, bond yields, which reacted favorably to the Fannie/Freddie bailout, are on their way back up. If the Fed and Treasury have to bail out Lehman, they’ll go even higher (investors are already concerned about the sums the government is shelling out to salvage the financial system), and the dollar may again be exposed, despite its impressive performance of late. And, as we noted yesterday, the situation with regional and commercial banks is becoming scary.