Monday's Developments

by Chris Sturr | October 13, 2008

This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.

Here’s the skivvy on the government interventions that triggered huge stock rallies (as for US stocks, Dow up some 750 points, S&P nearly back at 1,000, with about 15 minutes left in the trading day) worldwide (with the notable exception of Japan), from Reuters. But notice especially the following:

That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies.

Global bank rescue aims to halt crisis
Mon Oct 13, 2008 1:43pm EDT
By Daniel Trotta

NEW YORK (Reuters) – The world bet solidly on recapitalizing ailing banks as the fastest way out of the financial crisis in a clear new direction on Monday that reinvigorated stock markets after their worst week in history.

Led by the Britain, European governments agreed to multibillion-dollar guarantees for the banking system in moves that may become a crucial test of investor faith in government’s ability to reverse the downward spiral.

Stocks were up 7 percent in midday trading after the Dow tumbled 18 percent last week amid a climate of panic and uncertainty as credit markets seized up and major economies headed toward recession. European stocks closed 10 percent higher.

“Sometime last week it seemed like we faced Armageddon, so to have a coordinated plan on stabilizing banks is huge progress,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Wall Street also focused on investment bank Morgan Stanley, which reached a financing deal with Mitsubishi UFJ Financial Group Inc (MUFG), possibly with U.S. government support. Morgan shares soared 73 percent, after losing 58 percent lost last week.

In addition, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would lend commercial banks as much U.S. dollar liquidity they needed.

That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies.

U.S. bond markets were closed for the Columbus Day holiday. The euro and sterling gained strength on the European plans, and oil rose more than $3 to $81 a barrel.

The Treasury and Federal Reserve were working to finalize details of their own plan to recapitalize banks and stabilize financial markets in the wake of the measures announced in Europe.

For weeks the United States concentrated on a $700 billion rescue plan that emphasized buying up distressed debt from financial institutions, with Treasury Secretary Henry Paulson at first resisting U.S. government ownership of banks.

British Prime Minister Gordon Brown has shifted the world’s attention to the other side the balance sheet by proposing to inject new capital into banks to get them lending again.

The United States has since moved closer to the positions of European leaders, who were in Washington over weekend for meetings of the Group of Seven major economies, the International Monetary Fund and the World Bank.

BROWN PROFILE RISES

Brown has yet to win a mandate from British voters but his global profile has risen amid the crisis. He also called on world leaders to create a new “financial architecture” to update the current international economic system, which was set up at a conference in Bretton Woods, New Hampshire, in 1944.

“Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed.,” Brown said in a speech at the London offices of Thomson Reuters.

Britain’s bank plan called for 37 billion pounds ($64 billion) of taxpayers’ cash to bail out three major banks in a move that would likely make the government their main shareholder.

Germany, France, Italy and other European governments also announced rescue packages totaling hundreds of billions of dollars that were designed to combat the banking crisis, the worst since the Great Depression.

Britain’s bank plan called for 37 billion pounds ($64 billion) of taxpayers’ cash to bail out three major banks in a move that would likely make the government their main shareholder.

Germany, France, Italy and other European governments also announced rescue packages totaling hundreds of billions of dollars that were designed to combat the banking crisis, the worst since the Great Depression.

Iceland–forced over the past week to take over three big banks, shut down its stock market and abandon attempts to defend its currency–officially requested financing from the International Monetary Fund, an IMF official said.

The developments also calmed Princeton University economist Paul Krugman, who was named as the winner of the Nobel prize in economics on Monday.

“I’m slightly less terrified today than I was on Friday,” Krugman said. “We’re going to have a recession and perhaps a prolonged one but perhaps not a collapse.”

Japan said on Monday it was considering whether to guarantee all bank deposits, while the central bank said it might join further global efforts to boost dollar funding to strained money markets.

The two men vying to succeed U.S. President George W. Bush after the November 4 election were formulating their own plans.

Democrat Barack Obama, leading in public opinion polls, proposed a 90-day moratorium on home foreclosures and other measures aimed at creating jobs.

Republican John McCain was also considering rolling out a new economic package.

(Reporting by Reuters bureaus around the world; Additional writing by Eddie Evans; Editing by Gary Hill)

I’ll close by citing two blog posts that pick some holes in the new arrangements. From Yves Smith’s excellent Naked Capitalism:

The reader/investor who sent the link to this Bloomberg story provided the comments below. No, he does not resort to capital letters casually:

THIS IS HARD TO BELIEVE. THOSE CB’S DON’T HAVE UNLIMITED $’S,

SO IF TRUE, THEY WILL BE BORROWING THEM FROM THE FED VIA AN EXTENSION OF FED SWAP LINES,

THE FOMC HAS APPROVED LINES OF $620 BILLION AS LAST REPORTED

THIS IS FUNCTIONALLY UNSECURED LENDING TO THESE CB’S.

REPAYMENT CAN ONLY COME FROM SELLING THEIR OWN CURRENCIES FOR THE NEEDED $’S

(OR BY SOMEHOW NET EXPORTING TO THE US OR SELLING ASSETS TO THE US WHICH ARE HARD TO IMAGINE)

SOMEHOW THIS HIGH RISK, UNSECURED, ‘BACK DOOR’ LENDING HAS REMAINED UNDER ALL RADAR SCREENS.

AND, IF TRUE, WE WILL SOON SEE THE TOTAL $US FUNDING NEED IN THE EUROZONE.

And this, from the fine Across the Curve:

In the previous posting I noted that the German government rescue plan which includes guarantees and capital injections totalled 470 billion euros.

I hope that someone can point out a flaw in my logic but that would equate to about $2.7 trillion if one compares the relative GDP size of the US and Germany. In dollars the 470 billion Euros is $635 billion. The US GDP is about 4.3 times that of the German GDP. Do the simple extension of 4.3 times $635 billion and you get something in the neighborhood of $2.7 trillion.

There are no words to describe that sum. I dare say that it would be impossible to raise that sum in timely fashion without a total disruption of capital market flows.

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