What a Week!
Term Securities Lending Facility (TSLF)
On March 11th, 2008 (Tuesday), the Federal Reserve, in response to the most recent incarnation of the credit crisis announced the creation of the TSLF. From the press release:
The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.
In response to the announcement, the US markets rallied, with the Dow Jones posting a 400+ point gain. Suffice to say there was A LOT of chatter on the financial blogs and some individuals were down right outraged that the Fed would expose a meaningful portion of its balance sheet to phoney AAA mortgage backed securities. Steve Waldman suggested that the TSLF is nothing more than a covert nationalization of the banking system. Some suggested that the lending facility brings the Federal Reserve one step closer buying the securities outright to stem a financial meltdown.
Speculation, Inflation, & Faith
Investors responded to the announcement with skepticism, and expressed their disbelief by selling dollars. In fact the USD hit record lows against both the Japanese Yen and the Euro. The Euro appreciated from $1.53/dollar per euro to nearly $1.57. The week’s retail numbers confirmed our nation’s economic recession. Seeking safety, investors fled to foreign currencies, treasuries, and gold, which closed above $1,000 USD. Speculators no doubt piled in and caused prices to diverge more than what would be expected by fundamentals. Oil for instance, surged past $110.00/barrel.
Bear Stearns Bailout
While several hedge funds imploded, the most discussed failure was that of Bear Stearns. During the week, the firm’s CEO attempted to dispel fears of a liquidity crisis - much to no avail. The street simply stopped transacting business with Bear Stearns and investors sought to withdraw their capital caused an investment bank run. Using the TSLF, the Fed used JPM as a conduit to capitalize Bear Stearns. Many analysts are suggesting by Monday, Bear Stearns will no longer exist as independent entity.
So What’s Next?
While it is difficult to predict exactly what happens next, it definitely will not be boring. Expectations on the street seem to indicate additional bank failure and bank runs. RGEMonitor speculates that Lehman Brothers is next. Banks aside, the economy continues its decline, with CFO’s expecting the recession to last through 2009, and losses rearing their ugly head globally. It is going to get a lot worse before it gets better. If panic hits the baby boomers, and if they start liquidating their 401(k)s in response - watch out.
Shotgun Wedding: Bear Stearns and JP Morgan
Darkness Visible: CFOs See Recession Through 2009
ABCP players to seek bankruptcy protection
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About
My name is Arpan and this is my blog! I'll be writing about things I find interesting, and hopefully some stuff that you might too. Some posts are intentionally controversial and are intended to provoke discussion. Don't be shy!
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