Friday, September 19, 2008
Live Blogging The Financial Crisis
As a follow-up to the story from our sister blog Echomouse in Canada about some of the problems in Canada, we are rushing to press this morning to announce that the beginning of the end of the financial crisis is at hand. Henry Paulson, Bush's third Secretary of the Treasury, and the first one with the "right stuff", is the hero of this debacle. There is no time to wait for the election, the time to act is now.
Here's why. Yesterday, the Fed and the European Central Union's Bank (euro) did a $183 billion swap. Regardless of what you see and hear, the World still runs on dollars because of our political stability. We got $183 billion in euros and we gave their central bank $183 billion in dollars. Their central bank lent the cash out to its member banks, such as England, Switzerland, etc. Credit should have become immediately available world wide, credit spreads should have narrowed. It did NOT happen. The banks did NOT trust each other to lend each other money overnight. They each know what they have hidden in their own balance sheets, so they know they cannot trust each other. It's simply that simple. Circular, but true.
Remember the option arm loan, where people weren't paying the whole mortgage, and refinanced after two years? And all the other mortgage gimmicks? They got sold into pools, and the banks were buying them, because they were making money. Today, most of those loans are toxic, non-performing loans, and they are on the books of the banks. Want to lend a bank money against them? I didn't think so. Well, there are still billions of dollars of those mortgages floating around out there, and there lies the problem.
How do you get the toxic loans off the books of the banks. But that is just the beginning, the short term, the bailout of Wall Street. The real issue is how do we fix the system? This has been going for a long time. Fannie Mae was established in 1938, Freddie Mac in 1970. We repealed Glass-Stegal and allowed investment banks and commercial banks under the same roof around 2000, and we abolished the uptick rule for shorting last year. The unregulated mortgage industry has been in business for quite a while. Who regulates the Insurance Industry (your state) and co-ordinates policy (no one)? I don't want to sound like a Democrat or a Republican here, but everyone who cared to know saw what was happening. On the other hand, Freddie and Fannie had excellent lobbying arms.
The market will rally on the news that Paulson has crafted a solution to buy toxic loans and dispose of them (details to follow), plus a few other issues. The SEC has also banned short selling in financial stocks for the next two weeks. This guarantees a rally. A lot of what will happen will be political. When Nancy Pilosi or Harry Ried caused heartache, the market will fall. But for the most part, the bottom is probably in place, Have a great day, and a wonderful weekend.