We’re now having a Thanksgiving holiday for the markets. Indeed, there’s a slight chance that we’ll see a bear market rally in the coming weeks, the realization of which will depend on the success of central banks in easing year-end funding issues. A lot has been done, and at least for me, it’s hard to predict the outcome. Nevertheless, today’s developments in the interbank market do not emit positive signals:

The cost of borrowing in dollars for one month in London jumped the most since 1999 as banks sought to bolster balance sheets through year-end amid a squeeze on credit that’s being exacerbated by the global economic slump.

The London interbank offered rate, or Libor, that banks say they charge one another for such loans climbed 47 basis points to 1.90 percent today, British Bankers’ Association data showed. The Libor for three-month loans rose two basis points to 2.20 percent. The Libor-OIS spread, a measure of the willingness of banks to lend, also increased.

“There is some concern about the turn of the year,” said Patrick Jacq, a senior fixed-income strategist in Paris at BNP Paribas SA. “I wouldn’t be surprised to see this tension easing over the next few days as central banks address the situation with more liquidity.”

With little more than a month to go until the end of 2008, banks are vying for loans that mature after Dec. 31 to strengthen their balance sheets as they prepare to report to investors. Financial institutions mark the value of loans and cash positions at the end of each quarter. The euro interbank offered rate, or Euribor, for one-month loans rose 22 basis points to 3.61 percent today, the first increase in 24 days, according to the European Banking Federation.

Cash Hoarding

Banks and companies are hoarding cash amid concern interest-rate cuts and injections of liquidity along with government-spending programs won’t be enough to avert the worst global recession since World War II. Rates on U.S. commercial paper, or short-term company loans, climbed yesterday by the most in more than a month.

The Federal Reserve this week committed as much as $800 billion to thaw a freeze in credit for consumers and small businesses. The U.S. also provided a $306 billion rescue to Citigroup Inc. Financial institutions are cutting jobs amid $970 billion of writedowns and credit losses since the start of 2007.

Asian Rates

Money markets began seizing up in August 2007 as banks became wary of lending to each other on concern their counterparties were holding assets linked to U.S. subprime mortgages. They froze up after the Sept. 15 collapse of Lehman Brothers Holdings Inc. sparked concern more banks would follow. The one-month dollar rate jumped 40 basis points on Nov. 29 last year as banks sought cash for the year-end.

Asian financing costs were calmer today. Hong Kong’s three-month interbank lending rate, Hibor, rose about five basis points to 2 percent. Tokyo’s rate increased one basis point to about 0.87 percent. Singapore’s three-month U.S. dollar rate, known as Sibor, slipped to 2.20 percent, from about 2.21 percent.

China’s central bank yesterday lowered its one-year lending rate by the most since the 1997 Asian financial crisis, less than three weeks after Premier Wen Jiabao unveiled a 4 trillion yuan ($586 billion) stimulus plan.

‘Toxic Debt’                                                       

In a further indication of the squeeze in lending, the European Central Bank registered almost 217 billion euros ($280 billion) of cash deposited by banks yesterday in its overnight facility. It was the sixth straight day the figure surpassed 200 billion euros. The daily average in the first eight months of the year was 427 million euros.

The Libor-OIS spread, a gauge of cash scarcity among banks favored by former Fed Chairman Alan Greenspan, was little changed at 178 basis points. The difference between what banks and the Treasury pay to borrow money for three months, known as the TED spread, widened two basis points to 217 basis points. The spread, which reached a low this year of 76 basis points in May, was at 464 basis points on Oct. 10, the most since Bloomberg began compiling the data in 1984.

Hedge fund liquidations and redemptions, of course, continue unabated:

Bluebay Asset Management Plc dropped the most since its initial public offering two years ago after the manager of fixed-income investments said it will shut down its Emerging Market Total Return Fund.

The $1.2 billion hedge fund, which accounts for 6 percent of assets under management, had dropped 53 percent this year, Bluebay said today in a statement. Fund manager Simon Treacher resigned “following a breach of internal valuation policy,” it said. He couldn’t immediately be reached for comment.

“Marketing other funds may now become very difficult,” said Gurjit Kambo, a London-based analyst at Numis Securities Ltd. who tracks the industry. “People become more nervous about putting money into Bluebay.”

Bluebay won’t retreat from credit-market investments despite “extremely challenging” conditions, Chief Executive Officer Hugh Willis said in the statement. Satellite Asset Management LP and Artemis Asset Management joined the list this week of more than 75 hedge funds that have liquidated or restricted investor redemptions since the beginning of the year.

Bluebay declined 30 percent to 70 pence, valuing the London-based company at 135 million pounds ($208 million). The shares, which peaked at 568.25 pence in June 2007, have fallen 80 percent this year.

The Emerging Market Total Return Fund was hurt by “liquidity conditions” and is no longer viable on its own, Bluebay said. The closure means that revenue from funds that bet on both rising and falling share prices will probably be below analysts’ estimates, Bluebay said.

The fund was hurt by “a perfect storm” after two wrong bets on cash bonds and credit default swaps, Kambo said. The value of cash bonds failed to rise as Bluebay expected, and credit default swaps narrowed, meaning the perceived risk of default decreased, he said.

Satellite Asset Management LP, founded by former employees of billionaire George Soros, stopped client withdrawals from its three largest hedge funds and eliminated more than 30 jobs after losses reduced the firm’s assets to about $4 billion this year.

Satellite Overseas Fund Ltd., Satellite Fund II LP and Satellite Credit Opportunities Ltd. have declined as much as 35 percent in 2008, said a person with knowledge of the funds’ performance. Simon Rayler, Satellite’s general counsel, declined to comment and wouldn’t disclose how many people remain at the firm’s New York headquarters or London offices. Satellite oversaw about $7 billion for clients at the end of last year.

More than 75 hedge funds have liquidated or restricted investor redemptions since the start of the year as they cope with fallout from the global financial crisis. Investors pulled $40 billion from hedge funds last month, while market losses cut industry assets by $115 billion to $1.56 trillion, according to data compiled by Hedge Fund Research Inc. in Chicago.

“Barring volatility in the markets, I expect that by the end of the year, we would’ve seen the bulk of these redemption suspensions done,” said Ron Geffner, who represents hedge funds at the New York-based law firm Sadis & Goldberg LLP.

Satellite was started in 1999 by Lief Rosenblatt, Gabe Nechamkin and Mark Sonnino, who worked together for 11 years at Soros Fund Management LP in New York. The firm is retaining teams that trade bonds and loans and invest in companies going through events such as takeovers, said the person, who asked not to be identified because the information is private.

21% Redemption Rate

The company has received withdrawal notices, which are effective through June, for 21 percent of the $2 billion Satellite Overseas Fund Ltd., its largest fund, the person said.

Satellite has cash to meet current redemptions and will continue to run the funds and sell securities over a period of years to avoid unloading them quickly in slumping markets, the person said.

Commodities keep falling too. Of course with the investments of the past two years

Lead fell to a two-year low in London as reductions in automobile production erode demand for the metal used mostly in car batteries. Copper declined.

U.S. vehicle sales at the lowest since 1991 prompted cuts at General Motors Corp. and Ford Motor Co. China’s output of lead concentrate, used to make refined metal, climbed 14 percent in the first 10 months, according to Mainland Marketing Research Co.

“Investors and consumers have given up,” said David Thurtell, an analyst at Citigroup Global Markets in London. There is “a sharp rise in Chinese production and a sharp fall in auto demand.”

Lead for delivery in three months declined $81, or 6.8 percent, to $1,105 a metric ton on the London Metal Exchange, the lowest since July 2006. Prices have dropped 57 percent this year. Inventories in warehouses monitored by the LME rose 250 tons, or 0.6 percent, to 41,200 tons, according to the exchange’s daily report.

Copper fell on concern a slumping U.S. economy will crimp consumption of Chinese imports and demand for industrial metals in the Asian economy. Some economic indicators in China showed a “faster decline” this month, National Development and Reform Commission Chairman Zhang Ping said in Beijing today.

Copper usage in the U.S., the largest buyer after China, fell 9 percent in the first eight months and demand in China rose 13 percent, according to the International Copper Study Group.

“Over the last month or so, the perception is that China was slowing down faster than people thought it would,” said William Adams, an analyst at London-based Basemetals.com. “The Western world is putting on the brakes rapidly and therefore China can see their export demand will suffer.”

And yesterday China cut rates by the largest amount in 11 years.

China’s biggest interest-rate cut in 11 years highlights government concerns that the country risks spiraling unemployment, social unrest and the deepest economic slowdown in almost two decades.

The central bank yesterday lowered its benchmark one-year lending rate by the most since the 1997 Asian financial crisis, less than three weeks after Premier Wen Jiabao unveiled a 4 trillion yuan ($586 billion) stimulus plan.

“China’s trying to draw a line under unemployment and civil unrest,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “It’s the most challenging set of circumstances Beijing has had to face since late 1989 that culminated in the protests in Tiananmen Square.”

About 1,000 police and security guards this week attempted to break up a demonstration of fired workers that overturned a police car, smashed motorbikes and broke company equipment in southern Guangdong province, the state-run Xinhua News Agency reported yesterday. The nation’s “top policy priority” is maintaining growth to create jobs, Zhang Ping, chairman of the National Development and Reform Commission, told a briefing in Beijing today.

The central bank cut the key one-year lending rate 108 basis points to 5.58 percent. The deposit rate fell by the same amount to 2.52 percent.

‘Forceful, Fast’ Measures

China vaulted past the U.K. in 2005 to become the world’s fourth-largest economy, with growth averaging 9.9 percent for the past 30 years. The economy has expanded 68 times in size since free-market reforms began in 1978.

Gross domestic product may grow 5.5 percent next year, the slowest since a 3.8 percent expansion in 1990, CLSA Asia Pacific Markets forecasts. That compares with an 11.9 percent gain in 2007.

Some economic indicators declined more quickly this month, showing the urgency of “forceful and fast” measures to stimulate growth, the NDRC’s Zhang said.

China, the world’s most populous nation, is aiming for at least 8 percent growth to provide jobs for workers moving to the cities from the countryside. A decline to even that level would be tantamount to a recession, according to Tao Dong, chief Asia economist with Credit Suisse AG in Hong Kong.

Exports are suffering as recessions in the U.S., Europe and Japan cut demand for China’s toys, sneakers and computers. Net exports — the difference between exports and imports — accounted for a fifth of GDP growth last year.

Toy Exporters

Two-thirds of small toy exporters closed in the first nine months of this year, the customs bureau said this week.

“Employment is being impacted by factory closures and many migrant workers are returning to their home towns,” Zhang said.

China is trying to keep the official urban unemployment rate below 4.5 percent this year, which would be the highest in at least a decade. The Labor Ministry says the figures don’t account for millions of migrants who work in urban areas but aren’t registered there.

“Twenty percent of migrant workers may lose their jobs and in some provinces it is already at that level,” said Andy Xie, an independent economist in Shanghai who was formerly Morgan Stanley’s chief Asia economist. “When they return to their villages we don’t know how these things might work out.”

Deflation Risk

The size of the rate reduction also signals the central bank’s concern that the economy faces a bout of deflation as oil and commodity prices drop. That’s a switch from the first half of this year, when Governor Zhou Xiaochuan was focused on fighting inflation that rose to a 12-year high in February.

“The aggressive rate cut is a response to the central bank’s concern about the short-term deflation risk,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing, who predicts another 108 basis points of rate reductions in the coming year.

“There is still ample room to cut rates in the future,” said Peng Wensheng, head of China research at Barclays Capital in Hong Kong, who sees a 54 basis point reduction in December.

The fourth rate reduction since mid-September adds to the government’s package of measures to stimulate growth through 2010.

The State Council has pledged “fast and heavy-handed investment” and a “moderately loose” monetary policy. The plan spans housing, rural development, railroads, power grids and rebuilding after May’s earthquake in Sichuan province.

China’s cabinet said yesterday that it was studying extra measures to help struggling companies in the steel, auto, petrochemical and textile industries; to increase key commodity reserves; and to expand insurance for the jobless.

“In previous crises China could always get out of trouble by boosting its exports,” said Xie. “This time that’s not an option.”









This website declared a few days ago the Fed offers unlimited funding to institutions which it knows are bankrupt, but demands punitive interest in return, which it probably knows cannot be repaid.” Here are the latest developments on this matter:

American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate. The Fed will reduce the $85 billion loan to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company. The interest rate on the $60 billion credit line will be reduced to the three-month London interbank offered rate plus 3 percentage points, from a previous spread of 8.5 percentage points in the original rescue plan.  The original $85 billion loan was disclosed on Sept. 16, a day after the collapse of  Lehman Brothers. AIG later received an additional $37.8 billion credit line on Oct. 8 to shore up its securities-lending program and then another $20.9 billion on Oct. 30 under the Fed commercial paper program designed to unlock short-term debt markets. AIG has about $5.6 billion left unused in the CPFF. The company renewed doubt about its prospects today by saying in a federal filing that it might not survive.

AIG has posted a $24.5 billion third- quarter loss today. The insurer has posted about $43 billion in quarterly losses tied to home mortgages. Edward Liddy’s plan to repay the original $85 billion loan by selling units stalled as plunging financial markets cut into their value and hobbled potential buyers.

“It was obvious to me from Day One that the terms of that arrangement were really quite punitive in terms of the interest rate and the commitment fee and the shortness of it,” Liddy said today in a Bloomberg Television interview. “I started really about a week after I got here trying to renegotiate.”.

AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.

The revised rescue may fix two AIG operations that are draining cash because of the collapse of subprime mortgage markets. In the first, the U.S. will provide as much as $30 billion to help buy the underlying assets of credit-default swaps that AIG sold to investors, including banks. AIG will contribute $5 billion and bear the risk of the first $5 billion in losses, the Fed said.

Credit-Default Swaps

The insurer guaranteed about $372 billion of fixed-income investments in CDS as of Sept. 30, compared with $441 billion three months earlier. AIG booked more than $7 billion in writedowns during the quarter on the value of the swaps.

The New York Fed also will lend as much as $22.5 billion to a new limited-liability company to fund the purchase of residential mortgage-backed securities from AIG’s U.S. securities-lending collateral portfolio. AIG will make a $1 billion subordinated loan to the new entity and bear the risk for the first $1 billion of any losses, the Fed said. The securities lending operation and the previous $37.8 billion credit line from the Fed will be shut down, AIG said.

Securities lending accounted for $11.7 billion, or about two-thirds, of the $18.3 billion in impaired investments in the third quarter, AIG said.

The biggest insurers in North America posted more than $120 billion in writedowns and unrealized losses linked to the collapse of the mortgage market from the start of 2007, with AIG representing about half that total. The company has units that insure, originate and invest in home loans.

What’s the new one-year price target for GM? It’s zero, according to Deutsche Bank. GM is one of the best suited companies in the US for bankruptcy, as it hasn’t posted an annual profit since 2004 and its sales in the U.S. have declined every year since 1999. On what kind of capitalistic basis can the US government justify the saving of such a company? If it offers any great danger to the system, than it should be dismantled gradually. But to save it, and to allow it to exist as a living corpse is entirely against all the principles of a free market economy.

General Motors Corp. plummeted as much as 31 percent and moved toward its lowest level in 62 years after a Deutsche Bank AG analyst downgraded the shares, saying they may be worthless in a year.

“Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like,” Deutsche Bank’s Rod Lache wrote today in a note which recommended selling the shares and cut his 12-month price target to zero. He previously advised holding the stock.

Barclays Capital and Buckingham Research Group cut their price targets for GM to $1.

Government Support

This weekend, U.S. House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada wrote to Treasury Secretary Henry Paulson in order to urge that bank-bailout funds be opened up for loans to automakers. As Rahm Emanuel, chief of staff to President-elect Barack Obama, said the U.S. auto industry is “essential” to the economy, the White House signaled its opposition, saying aid to the industry wasn’t discussed during the debate on the banking bailout. Congress may take up automaker assistance when it returns next week.

GM, in a regulatory filing today said “Based on our estimated cash requirements through December 31, 2009, we do not expect our operations to generate sufficient cash flow to fund our obligations as they come due, and we do not currently have other traditional sources of liquidity available to fund these obligation.”

Implied volatility for GM options exceeded 300, a level Lehman Brothers Holdings Inc. topped before its bankruptcy filing and American International Group Inc. reached prior to the U.S. government’s bailout.

The particular case of GLG is related to Lehman, and thus its troubles are not that unexpected. However, we keep getting reports of more hedge funds freezing client withdrawals, as their debt-financed business model appears to have lost its credibility in the eyes of many investors:

GLG Partners Inc. limited client withdrawals from the $2.9 billion GLG European Long-Short Fund so it isn’t forced to sell selected investments that have tumbled in price, people familiar with the matter said. The fund, the London-based firm’s largest, segregated the securities in an account called a side-pocket, where it plans to hold them until values recover. Investors’ redemption requests will be reduced because the fund has fewer assets available for sale to raise cash.

GLG, which oversees $17 billion, took a similar step last month with its Emerging Markets Fund. GLG said last week it suspended redemptions from its Market Neutral Fund and GLG Credit Fund, also to prevent forced sales of investments.

“Hedge funds have seen and will likely see continued outflows given the market conditions,” Noam Gottesman, GLG’s chairman and co-chief executive officer, said in a call with analysts and investors today.

GLG, founded as a unit of Lehman Brothers Holdings Inc., said today that third-quarter profit excluding acquisition costs fell 25 percent to $21.8 million. Assets dropped 27 percent to $17.3 billion at the end of September from $23.7 billion on June 30.

Pre-IPO Securities

The European Long-Short fund saw the percentage of assets invested in companies preparing an IPO rise as the value of its publicly traded shares dropped. Those securities couldn’t be sold at the prices the fund paid for them.

Lagrange’s fund fell 14.6 percent this year through Sept. 30, according to data compiled by Bloomberg. That compares with the average 23 percent loss by long-short funds, according to data compiled by Hedge Fund Research Inc. in Chicago.

Meanwhile despite fears of waning demand, Treasuries gained after the government’s first sale of three-year notes in 18 months attracted stronger-than-forecast demand today. So far there is no evidence of any inflation panic among investors, and the continued massive borrowings of the government may hinder some inflation being realized, as the liquidity sucked out of the markets through government auctions is lost in the clogged channels of the US banking system, where the government throws it. But it’s especially important that, from Bloomberg “indirect bidders, a class of investors that includes foreign central banks, bought 36.1 percent of the notes sold today, the most since May 2005, when they purchased 40.3 percent. Investors bid for 3.07 times the amount offered, the most since May 1998.” This data in itself is enough to ensure continued strengthening of the dollar. Indeed, that is what I expect to occur throughout next year, and possibly beyong, based on the assumption that the economic slump will be long-lasting.

Yields on two-year notes fell to an almost eight-month low. The $25 billion auction drew a yield of 1.8 percent. Today’s sale was the first of three this week totaling $55 billion, the biggest quarterly refunding in more than four years.

“It was pretty obviously a very strong auction,” said, an interest-rate strategist in New York at Barclays Capital Inc., one of the 17 primary government securities dealers required to bid at Treasury sales. “It indicates that strong demand remains for short-end Treasuries and the Treasury’s not yet being penalized for increasing supply significantly.

Yields on the benchmark 10-year note fell 4 basis points to 3.75 percent, below their 200-day moving average of 3.79 percent.

AIG Rescue

The U.S. revived the three-year note to help pay for the Treasury’s $700 billion bank-rescue plan and fund a budget deficit projected to widen from last fiscal year’s $455 billion as the economy shrinks and tax receipts slow. The Federal Reserve and the Treasury today enhanced a rescue package for American International Group Inc., almost doubling to $150 billion an initial bailout in September, as the insurer burns through cash.

The government plans to sell $20 billion in 10-year notes Nov. 12 and $10 billion in 30-year bonds Nov. 13 as part of its quarterly refunding, the biggest since February 2004. The Securities Industry and Financial Markets Association recommended trading close at 2 p.m. in New York and stay shut worldwide tomorrow for the U.S. Veterans Day holiday.

`Find a Home’

“The fear was that this particular auction was going to fare poorly because the three-year was on a short day, the holiday was coming and we have more supply coming” this week, said Tom di Galoma, head of U.S. Treasury trading at Jefferies & Co., a brokerage for institutional investors in New York. “Money has got to find a home somewhere, and there are a lot of products that don’t exist anymore or institutions that just won’t buy those products anymore.”

Goldman Sachs Group Inc. forecast the deepest recession since 1982, with the economy contracting 3.5 percent in the fourth quarter and 2 percent in the first three months of 2009.

18-Month Turnaround

It will take at least 18 months to turn around the U.S., even if President-elect Barack Obama “does everything perfectly,” Columbia University Professor Joseph Stiglitz, a Nobel Prize-winning economist, wrote in the Washington Post yesterday.

The difference between two- and 10-year yields increased to 2.50 percentage points as the shorter-maturity notes outperformed. That’s the highest since October 2003, based on closing prices.

The yield gap reached a record of 2.74 percentage points in August 2003 after the Fed finished a series of 13 rate reductions. Typically, the spread is steepest as the central bank stops lowering borrowing costs and investors anticipate an economic recovery, according to Tony Crescenzi, chief bond strategist at Miller Tabak & Co. LLC in New York.

`Remain Depressed’

“I think yields will remain depressed and continue to decline here, particularly on the front end” of the Treasury market, said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. “The Treasury needs to fund all these bailout programs they are announcing, and that could keep pressure on the curve and keep it relatively steep, and that could present a struggle for the long end.”

The Treasury today also auctioned $27 billion in three- month bills at a rate of 0.355 percent and $27 billion of six- month bills at a rate of 0.99 percent.

After Australia, China, Japan, India, the U.S., the euro region and the U.K. all reducing interest rates within the past three weeks, there’s some improvement in the unsecured lending market. However, with the Libor-OIS spread still at an enormous 170 points, compared with a normal of just  11 basis points in the five years before the crisis started, we’re very far from a recovery in lending, and we’ll probably see even worse numbers in the coming weeks.

The London interbank offered rate, or Libor, that banks say they charge each other for such loans declined 5 basis points to 2.24 percent today, the lowest level since November 2004, the British Bankers’ Association said. The overnight rate rose 2 basis points to 0.35 percent, still 65 basis points below the Federal Reserve’s target rate. The Libor-OIS spread, a measure of banks’ willingness to lend, narrowed.

In a sign that central bank attempts to loosen credit are starting to work, interest rates on U.S. commercial paper, or CP, fell to the lowest in at least 12 years today. Rates on the highest-ranked 30-year CP dropped 16 basis points to 0.88 percent, or 12 basis points less than the Fed’s target’s rate. Average rates soared to a record 278 basis points more than the target rate on Oct. 9, according to yields offered by companies and compiled by Bloomberg since January 1996.

On the other hand, financial institutions lodged 225.5 billion euros ($288 billion) in the European Central Bank’s overnight deposit facility Nov. 7, down from 297.4 billion euros the previous day, the ECB said, indicating many banks are still reluctant to lend to each other. The daily average in the first eight months of the year was 427 million euros.

In Asia, three-month Hibor, the benchmark for Hong Kong interbank loans, dropped 10 basis points to 2.14 percent as the city’s monetary authority added funds to the system. Australian banks lowered the rate they charge each other for three-month loans by 3.7 basis points to 4.95 percent as the Reserve Bank of Australia signaled more rate cuts. A basis point is 0.01 percentage point.


There’s now speculation of widespread devaluations in emerging market currencies, and I believe that defaults in the emerging market sphere will be inevitable during the next two years. Bloomberg is reporting on Russia, but I’m much more concerned about Turkey, with its very large and worrying external deficit position, and its seemingly complacent economic leadership.  


Goldman is added to list of those who are dissatisfied with their analysts:

Goldman Sachs Group Inc., the Wall Street bank that cut 3,200 jobs, about 10 percent of its work force, last week, identified six equity analysts who were fired by the firm, including William Tanona, who covered companies such as JPMorgan Chase & Co., and Deane Dray, who followed General Electric Co.

“Goldman has always been the best, and when the best of the breed starts to weaken, it’s not a good sign for any of them,” said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. “Research was kind of a loss leader. If you’re not making money on the trading side, you can’t support the research.”

Bank and brokerages worldwide have eliminated about 150,000 jobs since the subprime mortgage market collapsed last year.

But the analysts themselves keep fluttering in Cloudcuckooland: (kudos to Aristophanes for this term)

Even after cutting estimates at the fastest rate ever, Wall Street strategists still need the biggest year-end rally in the Standard & Poor’s 500 Index for their forecasts to come true.

David Kostin of Goldman Sachs Group Inc. predicts an advance because U.S. companies are cheap relative to earnings. Strategas Research Partners’ Jason Trennert is counting on a resumption in bank lending to lift equities. Thomas Lee at JPMorgan Chase & Co. says stocks are swinging so much that a 25 percent jump by Dec. 31 isn’t out of the question. Kostin, Trennert and Lee are among the most pessimistic of Wall Street strategists with year-end estimates tracked by Bloomberg.  The average Wall Street forecast calls for the S&P 500 to break out of a bear market and surge 20 percent to 1,118 by Dec. 31 — more than twice as much as the biggest-ever advance to close out a year. Strategists were even more bullish at the beginning of the year, predicting that the S&P 500 would end 2008 at a record 1,632.

Strategists were also calling for a record gain at this time last year, after the first quarterly decline in corporate profits dragged the S&P 500 down from its high of 1,565.15 on Oct. 9. It never materialized and stocks have dropped 41 percent since.

The S&P 500 is poised for its worst year since the 1930s after almost $700 billion in bank losses froze credit markets and spurred concern the economy will shrink. U.S. equities posted the steepest monthly loss in 21 years in October and $6 trillion was erased from U.S. markets in 2008.

The strategist who cut his projection the most since September was Deutsche Bank AG’s Binky Chadha. Chadha abandoned his year-end call for the S&P 500 to reach 1,350, decreasing it on Nov. 7 to as low as 800 and becoming the first strategist to acknowledge the possibility that stocks may fall for the rest of the year. Chadha, previously one of Wall Street’s biggest bulls, declined to comment through spokeswoman Renee Calabro.

Fair Value                                          

Merrill Lynch & Co.’s Richard Bernstein also reduced his forecast last week. “Severe overvaluation at the end of August is correcting,” wrote Bernstein, who doesn’t provide a year-end estimate, on Nov. 4. “Our models are still working their way back to fair value.”

The rate at which strategists are reducing their estimates is a sign equities are close to a nadir, some investors say.

“The U.S. is going to be the first market out of the bottom,” Barton Biggs, a former Morgan Stanley strategist who now runs Traxis Partners LLC, a New York-based hedge fund, said on Bloomberg Television. “We’re at a major buying opportunity.”

And this is also where my 500 target for the S&P 500 in 2009 comes from: The S&P 500 trades at 10.39 times next year’s estimated earnings from continuing operations, compared with the weekly average of 21.1 times historical operating profit over the past decade, says Bloomberg. The key phrase here, is, of course, “estimated”. With the “analysts” performing with the accuracy of a coin toss, or a dice roll, it’s only a matter of time before the estimates are reduced to much lower levels, and that is when even todays P/E ratios will appear expensive. There’s some time for all this, but at least I’m quite confident in what I expect from next year.

And finally:

The state agency that runs New York City’s buses and subways may raise fares next year by more than the 8 percent it had previously proposed and implement deeper service cuts amid a swelling deficit.

The Metropolitan Transportation Authority needs to find ways to fill a budget gap that may widen by a third from a July projection to as much as $1.2 billion in 2009. The agency is facing lower projected tax revenue, higher debt costs and less money from fares as ridership is forecast to drop because of the climbing unemployment rate in the New York metropolitan area.

All news clips are from Bloomberg.

Activity in the financial markets continues to contract:

Banks have reported $687 billion of credit losses and writedowns since the start of last year as the worst U.S. housing slump since the Great Depression battered credit markets.

JPMorgan Chase & Co., the largest U.S. bank by market value, will shut down a global proprietary trading desk and shed some of the unit’s employees as the firm braces for a recession, a person familiar with the matter said.

“It’s been a very difficult trading environment,” said Jeffery Harte, a financial analyst at Sandler O’Neill & Partners in Chicago. “In the wake of that, everyone on the street is probably reevaluating capital commitments in regards to trading operations.”

Credit Suisse Group AG, Switzerland’s second-biggest bank, lost 609 million francs ($523 million) from proprietary trading, the firm said Oct. 23. The money-losing trading books will be reduced “significantly,” the firm said. Deutsche Bank AG, Germany’s largest lender, said Oct. 30 it lost 386 million euros betting on equities for the firm’s account.

Swiss Reinsurance Co., the world’s second-biggest reinsurer, posted its first loss in almost six years and suspended a share buyback program after wrong-way bets on credit-default swaps.

The third-quarter loss was 304 million Swiss francs ($259 million) after net income of 1.47 billion francs a year earlier. Swiss Re booked 289 million francs of writedowns on CDS in the third quarter, bringing losses in the past year to 2.81 billion francs.

Today’s writedown is “only the tip of the iceberg,” said Fabrizio Croce, an analyst at Kepler Capital Markets in Zurich who has a “reduce” rating on the stock.

And the contraction in the commercial real estate market is only at its beginning stages. Commercial real estate is a business that is by definition highly leveraged, and there’s no reason to think that the losses here will be less severe than in auto loans, or credit cards. While CRE is not the same as subprime, the very lax lending standards caused errors here too:

New York City commercial real estate transactions plunged 61 percent in 2008 through October as the global credit crisis roiled lending and sidelined buyers.

About $17 billion of transactions have closed so far and the market is headed for its worst year since 2004, according to data from Real Capital Analytics Inc. of New York. Sellers have made 237 deals of $5 million or more, a four-year low in a market that posted a record $51 billion in sales in 2007.

“The banks are not lending, and most of them are saying we’re done for the year,” said Scott Latham, executive vice president for New York investment sales at Cushman & Wakefield Inc., the largest closely held commercial brokerage. “In all likelihood, you will see next to no transactions between now and the end of the year.”

The office market will likely get worse in 2009 and may not improve for at least another year, said Andrew Simon, a managing director for NAI Global, a network of 325 independent commercial property brokerages.

No Rosy Outlook

“I don’t think the first half of 2009 is going to be very rosy,” said Simon. “I believe you’re talking about a year from now before you see more movement toward normalcy.”

Buyers and sellers are looking for a bottom, he said. .

Vornado Realty Trust said today the credit crisis and the slowing economy may lower profit in future quarters, while reducing the volume of real estate sales and reducing property values.

“Our existing real estate portfolio may be affected by tenant bankruptcies, store closures, lower occupancy and effective rents,” which may cut net income, Vornado said. Circuit City Stores Inc., the electronics retailer that announced 155 store closings this week, leases 12 locations from Vornado and pays $8.1 million in annual rent, Vornado said in a regulatory filing.

Global commercial sales fell 57 percent this year through August, Real Capital said in an Oct. 9 report. In the third- quarter, they fell 64 percent from the same period a year ago, according to preliminary data from the company.

In the U.S., sales have declined 72 percent this year through October, the biggest drop since the firm’s recordkeeping began in 2001, Real Capital said. Starting in 2004, property investors, fueled by cheap and abundant debt, began an unprecedented run to $514 billion of U.S. deals in 2007, said Dan Fasulo, Real Capital’s director of market analysis.

“I think it will be a while before we get to that figure again,” Fasulo said. “We’re going to do less than half of that in 2008.”

Sales involving New York real estate investor Harry Macklowe accounted for more than two- fifths of New York’s year-to-date dollar figure through October.

Macklowe paid $6 billion last year for seven Midtown skyscrapers, primarily using short term debt. His lender, Deutsche Bank AG, took control of the towers in February and sold five of them for $2.83 billion. Macklowe also sold the General Motors Building and three other buildings for $3.97 billion to Mortimer Zuckerman’s Boston Properties Inc.

Second-quarter commercial and multifamily mortgage originations tumbled 63 percent in the second quarter from the same period a year earlier, according to the Mortgage Bankers Association in Washington.

Office property loans fell 65 percent, retail property loans fell 63 percent and industrial property loans slid 57 percent, the MBA said. Loans slated for the commercial mortgage- backed securities market declined 98 percent in the second quarter from a year earlier, the group said.

And Commercial real estate activity in New York seems to be especially hard hit:

Financing of deals by so-called portfolio lenders, companies like commercial banks and life insurers that originate loans and keep them on their books, was also down. Loans by banks fell 29 percent and 27 percent for insurers, the MBA said.

The few deals being made usually require sellers to either provide financing or allow buyers to take over their existing loans, said Howard Michaels, chairman of the New York-based Carlton Group LLC, a real estate investment banking firm, which arranged the recapitalization of the GM Building for Macklowe in 2004, and Chicago’s Sears Tower in 2007.

“Most people are waiting to see how 2009 shakes out. Until then, nobody’s putting any buildings on the market unless they have to,” he said. “I don’t think that anybody would voluntarily sell into this market right now.”

Two properties remain on the market five months after they went up for sale. They are Worldwide Plaza on Eighth Avenue, a 1.7 million square-foot tower, and 1540 Broadway in Times Square, the former Bertelsmann Building. The seller of both buildings: Harry Macklowe’s lender, Deutsche Bank.

Meanwhile Fed’s balance sheet continues to grow, as it adds commercial paper to its portfolio of stocks, CMBS, MBS, bonds, and others:

The Fed’s balance sheet may expand to $3 trillion by year’s end, reflecting growth of various liquidity measures supporting banking institutions, Dallas Fed chief Richard Fisher said. As of Oct. 29, the Fed’s balance sheet was $1.97 trillion.

Still, the U.S. faces “an epic challenge,” Fisher said. “We are navigating the mother of all financial storms.” A recovery in the U.S. economy “will take time,” Fisher said in response to an audience question. “I don’t see any economic growth in 2009. None.”

Labor Department figures are expected to show a drop of 200,000 jobs in October, according to a Bloomberg News survey of economists. A report showed Oct. 3 that payrolls fell by 159,000 in September, the biggest drop in five years. The unemployment rate held at 6.1 percent, up from 5 percent as recently as April.

Commercial paper rates are falling, for now, as the Fed’s intervention brings much needed temporary relief to the market:

Interest rates on U.S. commercial paper fell to the lowest in four today. Rates on the highest-ranked 30-day commercial paper fell 0.27 percentage point to 1.74 percent, the lowest since Sept. 22, 2004. Yields on 90-day paper fell 0.06 percentage point to a three-month low of 2.62 percent.

The Fed set the rate it’s willing to accept for 90-day commercial paper at 2.6 percent, down 0.01 percentage point, including a 1 percentage point unsecured credit surcharge. The 90-day secured asset-backed rate was set at 3.6 percent, according to Fed data compiled by Bloomberg. The rates are set under the Fed’s Commercial Paper Funding Facility and are available on CPFF.

The following companies are among those that have registered with the CPFF: American Express Co.; American International Group Inc.; Chrysler Financial Corp.; Ford Motor Credit Corp.; GMAC LLC; General Electric Co.; General Electric Capital Corp.; Harley-Davidson Inc.; Kookmin Bank; Korea Development Bank; Morgan Stanley; Prudential Financial Inc. and Torchmark Corp.

Australia reduced its main rate today, and Libor continues to retreat, although it’s still at phantastically high rates compared with where it was a short time ago:

Tocday  the Libor-OIS spread narrowed 13 basis points to 210 basis points today. That still compares with 87 basis points on Sept. 12, the last working day before Lehman Brothers Holdings Inc. collapsed.

Interbank rates have tumbled worldwide as central banks slashed borrowing costs and governments pledged as much as $3 trillion of emergency funds to kickstart lending.

Australian central bank Governor Glenn Stevens lowered the overnight cash rate target to 5.25 percent from 6 percent in Sydney today, adding to last month’s 1 percentage point reduction. Fifteen of 16 economists in a Bloomberg survey forecast a half-point cut and one expected a quarter-point drop.

The European Central Bank and Bank of England are forecast to cut rates when they meet on Nov. 6.

As bankers see ongoing deleveraging everywhere:

UBS agreed last month to a $59.2 billion aid package from the government and central bank that will split off risky assets. Switzerland’s largest bank is seeking to halt client redemptions, which amounted to 83.6 billion francs at its money-management units in the third quarter.

UBS plans to transfer as much as $60 billion of debt assets to a fund backed by the Swiss National Bank, leaving it with “essentially zero” risk related to U.S. subprime, Alt-A, prime, commercial real estate and mortgage-backed securities, as well as student loan-backed securities and reference-linked notes, CEO Marcel Rohner said last month.

Since the rescue plan was announced, there have been “encouraging signs” for net new money flows, UBS Chief Financial Officer John Cryan told reporters on a conference call today.

Even so, clients may keep removing funds for some time as part of a “general trend of deleveraging,” he said. “That manifests itself in clients effectively selling investments and withdrawing proceeds to pay down debt.”

“It’s too uncertain” to give a long-term profitability outlook for the bank, Cryan said in an interview. “I don’t think any bank can say what its cost of funds is because markets aren’t standalone yet. And in an economic downturn no one knows what the revenue is going to be.”

All the news clips are gathered from Bloomberg.

At the moment, there’s political instability in Malaysia, Pakistan, Japan, Russia, Ukraine, and Turkey. Mexico, Iceland, Turkey, Russia, and Pakistan were or are also facing runs on their currencies. Banco de Mexico sold $2.5 billion in the market yesterday and early today to stem a rout in the peso and said it would offer an additional $400 million when the peso weakens more than 2 percent in a day.

VIX today exceeded 60 for the first time as the DJIA fell to a five- year low below 9,000. as Treasury Secretary H. Paulson is weighing plans government to invest in banks as the next step in trying to resolve the credit crisis.

Libor for three-month loans rose to 4.75 percent, the highest level since Dec. 28. The Libor-OIS spread widened to a record. The overnight dollar rate fell to 5.09 percent, still 359 basis points more than the Fed’s 1.5 percent target rate. The three-month rate in euros held at a record high of 5.39 percent.

ECB offered banks as much cash as they need for six days at its benchmark rate of 3.75 percent, also loaned banks a record $100 billion in overnight dollar funds, allotting most of the cash at 5 percent, down from 9.5 percent yesterday.

“Libor rates are now more or less meaningless because everyone is just doing business with the European Central Bank,” said Jan Misch, a money-market trader at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned bank, via Bloomberg.

South Korea, Taiwan and Hong Kong cut interest rates today, after yesterday’s coordinated reductions. The U.K. government also pledged to spend 50 billion pounds ($87 billion) to stave off a collapse of the British banking system.

Money-market rates rose in Hong Kong, Singapore and Japan to the highest levels in at least nine months. Hong Kong’s three-month interbank offered rate jumped to 4.4 percent, a one- year high. Singapore’s comparable rate for dollar loans increased to 4.51 percent, the highest level since Jan. 8.

Overnight borrowing costs for companies dropped to the lowest in almost two weeks after yesterday’s rate cuts and the Fed committed to buying commercial paper.

Iceland seizes a bank

One of the earliest victims of this crisis was Iceland. Their troubles have been intensifying since the collapse of Bear Sterns in March of this year.


From Bloomberg:


Iceland‘s government seized control of Kaupthing Bank hf, the nation’s biggest bank, completing the takeover of a financial industry that collapsed under the weight of foreign debt.


Iceland is guaranteeing Kaupthing’s domestic deposits and helping manage the banks to provide a “functioning domestic banking system,” the country’s Financial Supervisory Authority said in a statement on its Web site today.


Glitnir Bank hf, Landsbanki Island hf and Kaupthing are unable to finance about $61 billion of debt, 12 times the size of the economy. Their collapse has affected 420,000 British and Dutch customers, and frozen assets held by universities, hospitals, councils and even London’s police force. The government is seeking a loan from Russia and may ask for aid from the International Monetary Fund to help guarantee deposits. 


All trading in Iceland’s equity markets is suspended until Oct. 13 due to “unusual market conditions,” the country’s exchange said today.


Currency Peg


Trading in the krona ground to a halt today after the central bank yesterday ditched an attempt to fix the exchange rate at 131 krona to the euro. Nordea Bank AB, the biggest Scandinavian lender, said the krona hadn’t been traded on the spot market today, while the last quoted price was 340 per euro, compared with 122 a month ago.


Assets at Iceland’s three biggest banks had grown five-fold since 2004 as the companies looked to expand beyond the confines of an island with a population of 320,000, half that of Las Vegas. Much of that growth was debt financed, helping send gross external debt to 9.55 trillion kronur at the end of the second quarter, equivalent to $276,622 for every person on the island.


U.K. taxpayers will probably face a bill of at least 2.4 billion pounds ($4.1 billion) to compensate about 300,000 U.K. holders of accounts at Icesave, a unit of Landsbanki, the Financial Times reported, citing unidentified U.K. officials.


`Severe Recession’


“The economy may well contract more than 10 percent between now and the end of this crisis,” said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. “Inflation will jump to at least 50 percent to 75 percent in the coming months.”


To avert the collapse, Iceland will start talks with Russia on Tuesday to secure a loan of as much as 4 billion euros ($5.48 billion), Prime Minister Geir Haarde said late yesterday. He added that loans from the IMF and Russia “are not mutually exclusive,” though the government hadn’t, “at this point at least,” asked the IMF for a standby loan or an economic program.


Fitch Ratings Ltd. cut Iceland’s long-term foreign currency issuer default rating to BBB- from A-. The rating remains on negative watch, Fitch said.


Ukraine seizes a bank

Ukrainian lender Prominvestbank had its credit ratings cut three steps by Moody’s Investors Service after the country’s central bank seized control.

The National Bank of Ukraine appointed its deputy governor, Volodymyr Krotyuk, as the temporary head of Prominvestbank yesterday and imposed a moratorium on payments to creditors for six months.

Ukraine‘s government has the worst creditworthiness among Europe’s emerging markets, based on the cost of credit-default swaps. It joins Iceland, Germany, the U.K. and Belgium among a growing number of European countries taking control of banks.

Prominvestbank, Ukraine‘s sixth-largest lender, had 27.6 billion hryvnia ($5.1 billion) of assets as of Sept. 30, according to its Web site.

And RBS is loudly struggling with solvency issues.

FerroChina Says It Can’t Repay Loans

FerroChina Ltd., a Chinese steelmaker, said it is unable to repay loans totaling 706 million yuan ($104 million) because of the “current economic crisis,” and a further 4.52 billion yuan in loans and notes may also be at risk.

Production at FerroChina’s plants has been suspended and the mill is in talks with creditors and potential investors, the company said today in a statement to the Singapore Stock Exchange, without identifying companies.

The escalating credit crunch has toppled banks in the U.S. and Europe, frozen credit markets and slowed economic growth, curbing demand for China-made products. Steel prices and demand in China have been declining.

The company, which has a market value of S$436 million ($297 million), requested on Oct. 7 that its Singapore-listed shares be suspended from trade. The stock, which last traded at 54.5 Singapore cents, has slumped 70 percent this year.

“Due to the current economic crisis, the group is unable to repay part of its working capital loans aggregating approximately 706 million yuan which has become due and payable,” the statement said. “The management is seeking new equity and loan funding.”

Further loan facilities and notes of about 2.03 billion yuan and “some other working capital loans” totaling 2.49 billion yuan may potentially become due, it said.

Changshu Plants

FerroChina has plants in Changshu City and Changshu Riverside Industrial Park in Jiangsu province, according to today’s statement. The company produced 1.65 million metric tons of steel in 2007, according to Kelly Chia, an analyst at OCBC Investment Research Pte.

“It could be because some of its customers weren’t able to pay up, or the price of its products weren’t enough to fund its working capital,” Chia said by phone from Singapore.

FerroChina reported net profit more than tripled to 230.4 million yuan in the second quarter from a year earlier, according to a slides presentation from the company on Aug. 14.

“Given the weak capital market and poor economic conditions, there is no assurance that we can be successful” in the talks with potential investors and creditors, today’s statement said. The talks with would-be investors were announced in a company statement on Sept. 16.

“As a zinc-galvanizing steel sheet producer, the slowdown in building, manufacturing and home-appliance industries hurt the company’s sales,” JPMorgan Chase’s Qin said.

The Chinese price of hot-rolled coil, a benchmark product, has fallen 29 percent to 4,230 yuan a ton from a record 5,957 yuan on June 5, according to Beijing Antaike Information Development Co.

Damage from the credit crunch accelerated last week as Washington Mutual collapsed, and Wachovia was sold. In Europe, BNP Paribas agreed to buy Fortis’s units in Belgium and Luxembourg for 14.5 billion euros after the failure of a government rescue, while the German state and financial institutions formed a 50 billion euro package to save Hypo Real Estate. Germany also declared on Sunday a guarantee on all private German bank accounts – currently worth €568bn – to prevent panic withdrawals, covering existing accounts and others which savers will open in the future. Germany’s previous protection scheme had guaranteed 90% of all bank deposits but only up to €20,000 per account. Ireland last week also guaranteed the liabilities of six of its banks.

Libor is slightly down today (one month dollar at 4.09 per cent vs 4.11 per cent), though the dollar-OIS spread is at about 290 — way above historical levels. Three-month Libor is at 4.29 percent, the biggest premium over the Fed’s benchmark since the FED began using a target for the overnight federal funds rate between banks as its main tool around 1990.

In response, the Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering other ways to unfreeze short-term lending markets. Since the collapse of Lehman, around 2 trillion dollars have been injected into the system, with barely any effect.

“The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,” Fed and Treasury officials are “consulting with market participants on ways to provide additional support for term unsecured funding markets”.

Also, Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, obviously in preparation for the year-end cash squeeze.

Assets on the Fed’s balance sheet expanded $285 billion last week to $1.498 trillion, the biggest one-week increase ever, according to JPMorgan Chase & Co. The Fed’s loans to commercial banks through the discount window rose about $10 billion to $49.5 billion last week. Borrowing by securities firms totaled $146.6 billion, up from $105.7 billion. American International Group Inc., the largest U.S. insurer, drew down $61.2 billion of its $85 billion credit line from the Fed.

“For the most part this is the Fed acting as a replacement for private banks,” said Lou Crandall, chief economist at Wrightson ICAP LLC, in Jersey City, New Jersey. “It is moving private-market functions into the public sector because the private market has reduced capacity.”

Meanwhile, to finance the Treasury’s new rescue plans, officials are considering changes to federal government debt sales, including a reintroduction of three-year notes. Changes will be released at the Treasury’s Nov. 5 quarterly announcement on sales of long-term debt.

The Treasury also said that some of its cash-management bills may be “longer-dated.” The expansion in issuance is needed to “allow Treasury to adequately respond to the near- term increase in borrowing requirements”. Treasury officials last month also started a special program of bill auctions to help the Fed expand its balance sheet.

In yet another step announced today, Fed will also begin to pay interest on the reserves it holds for banks, and payments on required reserves will be made at the average targeted federal funds rate established by the Federal Open Market Committee over each so-called reserve maintenance period less 10 basis points.

In addition to the cash banks must hold at the Fed, lenders also sometimes place excess reserves. The central bank said today it will pay interest on those funds at the lowest targeted federal funds rate for each period less 75 basis points. That will put a floor under the actual fed funds rate each day and let the Fed “expand its balance sheet as necessary to provide the liquidity necessary to support financial stability.”

The New York Fed has been having difficulty controlling the overnight federal funds rate – while the target is 2 percent, the effective rate was below that level every day from Sept. 19 to Sept. 29.

In the CDS markets, Monday saw price-setting for settling up to $500bn of contracts related to Fannie Mae and Freddie Mac. This price is called the recovery value, and will determine the payouts to be made by insurers and banks that offered credit cover on the mortgage financiers in recent months. Unwinding and settling these derivatives is expected to be the biggest test yet for the thus-far unregulated $54,000bn credit derivatives market. The Fannie/Freddie payouts could amount to $75bn, assuming a recovery value of 85 cents in the dollar, but the exact number of credit default swaps which reference Fannie and Freddie is not known, although analysts estimate a range from $200bn to $500bn.

The Federal Reserve Bank of New York will meet tomorrow with banks and investors in credit-default swaps to gauge progress on an initiative to create a clearinghouse to curb risks in the market, a spokesman said. The Clearing Corp., a Chicago clearinghouse owned by some of the biggest credit-default swap market-makers, has faced delays in setting up a system for guaranteeing trades as the Fed pushed it to obtain a banking license that would place it under the central bank’s watch. The company and the banks are “moving aggressively to launch the CDS clearing platform by the end of this year,” Clearing Corp. said in a Sept. 29 statement.


Jim “Mad Money” Cramer today has urged investors to get out of the stock market, as the DOW fell below 10000, and VIX reached levels above 50:

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,”

“I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

With respect to the Treasury’s plan, the so-called TARP, a lot is unclear, but the chief economist of BNP-Paribas has some pithy points:

1. Participation is voluntary. As with the 1992 Cooperative Credit Purchasing Corporation in Japan, some potential participants may not offer assets for fear of having to crystallise losses. Side conditions such as the restrictions on executive pay may reduce participation further.

2. Despite its gargantuan size and massive grant of powers to the Treasury Secretary, it has failed to convince the markets it will break the back of the crisis.

3. The mechanism to set prices remains obscure. If auctions are restricted to single assets then there may be very few bids because there are very few holders (one or two in some cases). If heterogeneous assets are included in the same auction then setting a price becomes very difficult.

4. There is no clear idea how the cut off price will be calculated or what proportion of offers will be accepted and other aspects of the pricing mechanism.

5. Capital will be injected to firms who may not need it and to those who may not survive in any case. This is poor value for money indeed.

6. There is no matching requirement for shareholders to inject capital or to suspend dividends to match the capital put in by the public sector. Warrants are a poor substitute.

7. The plan does not tackle the fundamental source of the bad loans afflicting the system – falling house prices and an excessive debt burden being faced by US households.

Congress haggling…

September 24, 2008

The US Congress continues to haggle with the administration on what to add or subtract from the rescue plan. They seem to be in a rather strange complacent mood, but if they don’t do something soon, their pleasant stupor may be ended by another large bankruptcy. Quotes are from Bloomberg:


“There’s no real term funding markets except for central banks,” said Meyrick Chapman, at UBS AG. “The Libor is meaningless. It’s for unsecured lending and there is no unsecured lending as far as I can see.”


“We’re seeing the financial system being restructured before our eyes,” said Peter Hahn, a London-based research fellow at Cass Business School and a former managing director at Citigroup Inc. “We really have to accept the fact that the central banks are replacing the entire interbank market.”


I wrote weeks ago that the year end period would be very chaotic this year, and the early hoarding that is going on shows the difficulties in short term funding.  the Libor-OIS spread widened 31 basis points to 166 basis points today, the highest level since at least December 2001.


In Europe, The ECB allotted 50 billion euros at its three month auction at a marginal rate of 4.98 percent, highest since 2000. Bids were for 155 billion euros.


In the US, banks paid 3.75 percent at yesterday’s 28-day Fed term auction facility, or TAF. That’s 57 basis points more than yesterday’s one-month rate, the widest spread since the TAF program began in December.


There does appear to be an ominous air in the financial markets. The situation of short term funding is very worrying.

Overnight Dollar Libor fell 28 basis points to 2.97 percent on Monday. That’s 97 basis points higher than the Federal Reserve’s target rate, compared with an average 10 basis points during the past seven years.

The TED spread narrowed 9 basis points to 224 basis points today. Last week, it had exceeded the 300 basis points at one point.

One week Euribor, jumped 10 basis points on Monday to 4.65 percent, while the three-month rate rose 2 basis points to 5.03 percent. It is the highest level since November 2000.

Meanwhile, Goldman and Morgan Stanley have both filed applications at the Federal Reserve to become regular banks, either through acquisitions, or through the building of a deposit base.

Fed’s Statement:

“Release Date: September 21, 2008, for release at 9:30 p.m. EDT

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.”

All the large investment banks of US have disappeared this year. It is the end of an era.


All this has allowed tensions to ease considerably in the financial markets, albeit from extremely high levels. The scope and size of the Treasury’s rescue package will determine the direction of future developments. Nonetheless, as long as there’s uncertainty and fear in the interbank, and inter-institution financing, at one moment we may be faced with a shock again. Volatile is the word that describes the situation.

After taking over the GSE’s, and bailing out AIG over the week, the government has finally decided to purchase almost the entire load of bad debt on banks’ and other financial institutions’ balance sheets. It’s expected that one entity will buy up to around 800 billion of troubled paper from banks, while another 400 billion will be used to insure money market funds against a run. But a lot is unclear about the details yet.


To put this into perspective, Citigroup Inc., JPMorgan, Bank of America, Goldman Sachs , Merrill and Lehman alone had more than $500 billion of so-called Level 3 “illiquid, difficult to price” assets as of June 30, according to data in a Sept. 15 report from CreditSights Inc, Bloomberg reports. So it appears that, while significant, the amount of funds available through these entities will have to be increased at some point. Besides, it seems that the financial institutions will have to repurchase their assets in the future, that is, the new entity will be a giant long term repo facility. That would make this only an attempt an procrastination, rather than resolution. If there will be a bailout, the paper must be bought and held, without any expectation of redemption. The attempt at liquefying the bankinbg industry through Fed’s temporary facilities has clearly failed already, there’s no reason to think that a longer term facility will inspire the necessary confidence to fundamentally change the picture.


Nonetheless a brief period of general rally is possible now. Stock markets rallied through the hardest periods of last year, and interest rate reductions across the world, coupled with this temporary bailout of the financial sector may help to calm people for a while. But don’t be deluded by this development; year-end funding period is approaching, and right after the beginning of November, there’s every chance that we’ll see mayhem in the wider financial sector.  


Meanwhile, the yen interbank market has been shutdown for foreign borrowers. Japanese are in general very worried about lending anything at all to westerners, while among themselves they seem to be willing to trade on usual terms. Today the Bank of Japan pumped 2 trillion yen ($19.15 billion) into the money market for the fourth time as overnight call rate is above their 0.5 percent policy target.


“Lenders have become exceptionally conservative. Some foreign players are unlikely to get any money from the market,” a money dealer at a Japanese insurer reports via Reuters.

In Australia, the central bank added A$2.03 billion ($1.6 billion) in its regular market operation repurchase agreements, while draining A$1.0 billion through a same-day forex swap. Commercial banks’ balances with the central bank remain near a record A$6.97 billion. Libor-ois spread, the spread between three-month bank bill rates and three-month overnight index swap rates, surged to a record of 95 basis points, up from around 33 basis points at the start of the month in Australia.

In Europe, dollar overnight rates have stabilised since yesterday, however, three month spread on interbank dollar  was still quoted at a very high level, with offers(libor) at 4.25, and bids(depo rate) at 3,50 – up from 3,20 yesterday, while 2,15 is where they should be in normal times. The interpretation is that banks continue to expect dollar funding to remain extremely tight during the next few months, leading to year-end; and while central bank injections may ease the situation temporarily, there’s very little impact on the longer end of the yield curve. The situation is still tense.

Overnight U.S. dollar funding costs fell to 2 percent as of this hour after central bank action, 4 am New York time, compared with around 5 percent yeasterday in Europe and as high as 8.5 percent in early Asian trading today. Traders in Singapore and Malaysia said while overnight U.S. dollar funds were quoted between 6 and 7 percent, some deals took place at levels as high as 8 and 8.5 percent.


Central banks across the world are finally pumping massive amounts of liquidity in the short term markets in order to ease the recent unprecedented collapse in credit markets.


South Korea’s central bank is injecting dollars into the local dollar/won swap market as it is facing ‘an excessive imbalance’. Bank of India intervened to stop dollar’s rise against the rupee. Hong Kong’s central bank injected HK$1.556 billion (US$199.5 million) into the interbank market as short term funding tightened and the Hong Kong stock market fell more than 7 percent.


The Fed has doubled the amount on offer through its swap lines to the major central banks of the world, and the total amount has been quadrupled, as short term dollar funding activity is frozen. The doubling appears to have been an arbitrary choice, essentially a jump to the largest near integer to deal with the massive and sudden vacuum in the credit markets in general.


Excerpts from Fed’s Statement of 3 am New York time:


“Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets.”


“Federal Reserve Actions


The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks.


The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion.


In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada.

All of these reciprocal currency arrangements have been authorized through January 30, 2009.”


All these banks are announcing overnight repos around now.


Update: Central banks have been acting through morning and noon.


After central bank injections, overnight dollar is down to 3.84% today 7am New York time, from 5.03% yesterday. However, three month dollar libor is still climbing, to 3.20% from 3.06%.


Later, through 9 am, New York Federal Reserve added a combined total of $105 billion of temporary reserves to the banking system through repos, exceeding the biggest day’s combined total in September 2001. Overnight rates finally settled around three percent.



As expected, the bailout of AIG has given a temporary relief to short term markets, with less central bank activity today. The ECB will not be conducting any special one day operation, allowing yesterday’s 70 billion to mature and be taken out of the system, but in its usual weekly auction it will offer 39 billion more than what it estimates to be the banks’ liquidity need.


From Reuters:


“Overnight dollar funds were borrowed at rates as high as 8 percent earlier in the European session, according to prices indicated on Reuters screens, before easing back to anywhere between 3.00 percent and 5.00 percent later in the session.

There were some signs of relief in that rates were not as high as Tuesday’s extraordinary peaks above 10 percent and market participants said liquidity was flowing through the system a little more easily than Tuesday.

But conditions remain strained.

Overnight funds are well above the Fed’s target rate, and the cost of interbank three-month dollar funds was indicated on Wednesday at its highest level since January.

In addition, activity was still being carried out on a discreet basis, with no benchmark pricing and banks dealing with counterparties only on an ad-hoc basis.” 

Of course, after a period of extreme pessimism and panic in financial markets, a period of relaxation and maybe even euphoria is natural. Both of the major issues that have been guiding speculators have been resolved, with Lehman banrupt, AIG and GSE’s nationalised. I have already been hearing speculation that the worst of the crisis is over, that the worst risks have been eliminated, and unless more shocks befall the financial system in the short term, a rally is quite possible.


In the medium and longer term, however, Lehman’s collapse will cause the already tight financial markets to become even more constricted, as perception of counterparty risk becomes more acute, and the anticipation of who will be next leads the stock market to prevent an orderly resolution of the crisis. As I have pointed out repeatedly here, in a crisis environment such as this, everything that contributed to the bubbling up of the financial markets in the past years will revert to become negative factors for the health of the economy, and lead it to the deteriorate faster and deeper, snowballing on impulse. Again, this is only a mirror image of the rising market, only that all the positive aspects are present in equal force, but in the opposite direction. 


Today the stock market has the will and the means to bring down anyone it sets its eyes on, and as it has been noted by others, the behaviour of speculators has recently been quite similar to pack animals. In the cases of Bear, Lehman, and AIG, speculators first identified who was perceived as the weakest of the lot, and then grouped to attack and batter it until it was bankrupt. This phenomenon has important implications: First, rumours will matter more than fundamentals, even more so than usual. No one knows the true content of any bank’s balance sheet, and naturally, rumours will direct the markets. Second, what the management does for any company is now less relevant, as we observed when Lehman was essentially punished for announcing measures to improve its balance sheet. That is, its fall accelerated after it declared that it would take measures to better its situation. Third, government officials will feel even more cornered, as the burden on their shoulders and the stress this creates, along with the paradoxical nature of their responsibilities, lead them to errors. Mr. Paulson has been quite candid about the extreme stress under which he has been operating.


There’s no easy resolution to this crisis. It’s very similar to the position of an individual, who, after borrowing much more than he could pay, contemplates a quick exit from his troubles upon facing bankruptcy. However, one can’t leave a plane after it has taken off, and this fact, I suspect, is what the financial system must contemplate today.