Malevolence
The Bailout and the Abyss, a bed time story.
I’m not so sure that the Post is all that renowned as a financial source of record, and 500 trades strikes me as a gross exaggeration in a market system that will process millions or billions of transactions a day.
Regardless of any exaggerations, the basics of the article are true. The most important item, for me anyway, is the note that the commercial paper(CP) markets failed. It’s worth accessing Wisdom to learn a little about one of the world’s most fluid. liquid, and safest debt markets.
Until last week. The doors closed. The liquid dried. Almost no entity was deemed credit worthy. Money markets supply most of the funds for this market, but they took their ball and went home in fear of “breaking the buck” which is the money market equivalent of guest starring on Dateline with Chris Hanson.
Danger? Only the gaping maw of darkness opening wide.
Melodramatic? How about requiring a retitling of the Great Depression to the First Depression, like the Great War was retitled the First World War.
With the CP markets dry, many companies then turn to “backstop” credit lines, taken for just this sort of situation. Banks give them out expecting that they would never be used, charge nominal fees for the unused portion of the lines, and frequently the credit lines carry interest rates very unfavorable to the bank.
Exactly the sort of thing many banks can’t afford these days. The sort of thing that when lenders and finance guys gather around a table these days and hear that a backstop is being drawn for $X million dollars, be it 5, 20, or 100, renders the room totally silent. Then, with an echo of terror in his eyes, the managing lender comments, “You make sure they know we can’t afford to keep funding this… this line was never supposed to be used.” The threat implied that the client needs to figure out a different way to get their financing or face having the credit line pulled out from under them, and damn the legal commitment.
And should the CP markets remain dry, banks would be run under. Eventually a bank would be forced to cancel a credit facility or refuse to fund a client. That’s not the sort of thing that stays quiet in the financial world. That bank itself would likely find it difficult to get funding on the CP market… and then, as rumors of liquidity problems spread, more of the bank’s own creditors would being to deny funding. Then you’d get the inevitable bank run.
And nothing kills a bank faster than a good bank run. If it’s just one bank (IndyMac), then fine. It’s a good headline. The CP markets could bring down many banks, and not just your corner community bank. Second and third tier banks. If you’re in Texas, I offer Frost Bank, the Midwest I could go with Harris (even though Harris is backed by Bank of Montreal, but something of that size)… how about National City. It’s already on the rocks anyway. Bank of the West for those in the Rockies. I can’t think of anything on the east coast. Such a situation could even bring down a top tier institution such as B of A, Citi, JPM Chase, Wachovia, or Wells Fargo. A couple years ago I might have tossed WaMu into that list, but, well…. And these are just names of banks for examples… don’t read too much into this.
And so what if some banks fail? Just some banks, some fat cats with outsized bonuses they get by outsourcing jobs.
Some credit for businesses large and small. Payrolls would come in late, capital expansion projects delayed, cancelled, or abandoned in process. Well… I think you can pick up the thread of the story from here by cracking the cover on the Great Depression.
The bailout? All but required. It makes no sense to exclude “foreign” banks that have significant operations in the US. Back to Harris Bank… it’s owned by Bank of Montreal, yet in the US Harris employs thousands and has some $40 billion in assets. Should Harris not qualify? Why should UBS’s American operations not qualify?
And the bailout is needed sooner rather than later. It’s not so much the timing as a need to “show me the money” and prove that the bailout is real and not a tease. If it drags, the CP markets (which function for now) may run dry again, although extending gov’t protection to money market funds helps to a great extent.
The further question being how the world is going to react to $700B of new Treasury bills. Despite having crowned China as the world’s most powerful economy, that doesn’t mean the US can’t still taken the world down with it… but China can save us. And the Oil states. Vested interests to see us through things. Weaker dollar is probable, but the strength the dollar has shown the last couple months gives us a little cushion.
The UK is apparently not considering such a bailout as feasible citing budget deficit problems.
We stand at multiple cross roads. At one, the choice between principle and ruin on the one hand and moral defeat and the chance of economic salvation on the other. A different cross road at the same location gives us the choice between the chill of chaos and the warmth of growth which we have enjoyed the benefits of for nigh thirty years in one direction and the other direction being sure certainty in safety and the drag of stagnation.
Lessons learned? Statistical models are amazing, sophisticated, elaborate and yet the numbers never capture the whole story… or if they do the human discounts the downside while emphasizing the upside. Quantitative finance has allowed the banking world to operate on a razors edge, always at the limit. This drives progress all over the economy and in people’s lives (see: Mortgages, Housing Boom Driven by) and for every boom and bust, the bust never takes us as far back as we were before the boom. However, I suspect the human side of the equation fancied itself too invulnerable in its quant armor and subordinated the flesh and blood judgement of intuition and reason to the cold numbers of a model.
Chaos is the way. The right way, rather. For now, I believe that the country is had its fill of fear and stress. The US just wants to sit down and rest… make all the wories go away. We will not choose the warm embrace of growth for the fear of the chaos that comes with it.
And the mantle of economic leader is awful heavy these days. Mayhaps someone else could lug it around for a while. Ah, here’s China with its government managed economy, so strong and bright. No doubt we’ll follow their lead now.
As to the other cross roads… well, faced with the choice between certain doom and possible salvation, the choice is clear. Not even Congress is that dumb. Not that the situation won’t be seen as the opportunity to arm twist another economic stimulus out… for Main Street, you see. We can only hope the deed is done before the current spark of hope fades again… it may be harder to relight it later.
Fear drains the soul, and I am so tired. I see uncertainty, resignation, and even sometimes despair all around me… and why not? We’ve done everything we can, and now we dust our hands and say que sera, sera?
What will be, will be indeed.
Keepin’ it surreal,
Tommy Lasorda
