At first I thought Minyanville was a kind of bearish Jim Cramer finance-infotainment outlet. It seems like that’s also how they originally envisioned themselves, but like the court jester whose “jokes” cut closer to reality than all the king’s courtesans, they produce some really spot-on stuff that other MSM can’t get themselves to say out loud.
Essentially, what the Fed is doing is taking the stigma away from the discount window–the Fed will lend directly to banks and the banks don’t have to tell anybody. Theoretically, the Fed could make these quiet loans for indefinite periods, thus giving banks more permanent capital (it’s really credit, but banks call it capital).
I have a feeling the Fed moved less yesterday than expected because foreign investors (foreign central banks) were crying foul. A bigger move would further deteriorate the dollar and thus their investments in the dollar. It would also hurt their exports. They are getting pretty tired of this game and trade pressures are building.
The Fed knows that higher stock prices are important to reflate since 90% of global liquidity is dependent on high asset prices as collateral. Thus they are desperate to finance banks’ collateral values. How to do that? The only way is to lend directly to them.
The plan won’t work. Under the repo/fractional reserve system the debt can be hidden because it is spread out among many banks. Tthe Fed lending $10 billion (and thus their balance sheet rising by $10 billion) will turn into $500 billion as other banks lend that money out and only keep a fraction of it for themselves. This is not working. Under the “new” plan the Fed will lend directly to each bank. If they want to create $500 billion of new credit the Fed’s balance sheet will increase $500 billion.
This will be obvious to foreigners just like a big cut in the discount rate. This is why gold is up this morning in response to this “new” plan which is really just a hidden discount rate cut: if the Fed is willing to pervert its balance sheet to this extent the dollar will fall.
And gold (in dollars) will go up.
Incidentally, there’s no better way to rape the credibility of the dollar, and intra-market trust, than for the Mishkin Fed to secretively extend loans to select unknown banks, which the banks couldn’t have otherwise secured on the open market. There will be no way in hell for investors to have any clue which banks are in trouble and which ones aren’t. Frederic Mishkin, the most brilliant idiot in the country, has given birth to the mother of all off-balance-sheet vehicles.
I’ve said it before and I’ll say it again: buy gold.
And, as all of us non-Harvardian nitwits predicted, the Fed’s latest “stunt” has done absolutely nothing to calm the interbank markets. It has made things worse. The Ted Spread, the difference between 3-month Tbills and 3-month LIBOR (the benchmark for the market of private lending), has jumped to almost 230 basis points. At the peak of the August panic it was at 245. It didn’t even take one hour.
This is pathetic.
Any bets on how many bulls will be running to the TIPS market–particularly that really inflation-sensitive 5-year TIPS one–for vindication?
What about the 2-year vanillas?
Update: DealBreaker adds:
Fed Using Very Old Valuations For The Term Loan Facility Auction
Perhaps the most surprising discovery we made today was the high value the Federal Reserve is willing to assign to some of the asset classes that have lately been causing so much turmoil in the markets. Even as some banks have said that the value of their CDO portfolios is unknowable and the ratings agencies have been mercilessly—if belatedly—downgrading formerly highly rated debt securities, the Federal Reserve has announced it will pay 85 cents on the dollar for CDOs with no market price available. That sounds like a pretty sweet deal in today’s markets.
It’s almost as if the Fed hadn’t been paying attention to the recent turmoil in credit markets. Don’t they know there is widespread skepticism about even triple A rated debt paper these days?
And, apparently, they haven’t been paying attention. The documentation the Fed has provided for collateral values became effective on September 22, 2006—over one year ago! Aside for some minor changes and the addition of some explanatory material at the bottom of their collateral valuation chart, the spreadsheet has not been changed to reflect the repricing of debt in the market place.
Basically, the Fed is turning back the clock on the CDO market. It’s 2006 all over again, boys and girls.
Sounds like a very fine deal for a certain company whose name starts with “C” and ends with “itigroup” …