Wednesday, September 17, 2008

Fed Backtracked

Well, what can you say.... I thought the money could be forthcoming from big foreign banks, obviously the sum came short and the Fed decided that the financial guys called its bluff and decided to fold instead. Many will question why Bear Stearns, and the Fannie & Freddie... but not Lehman Brothers?? For AIG, they stepped in again.

I thought they had drawn a line in the sand saying no more bailouts by leaving Lehman to go to bankruptcy. Obviously Merrill had the same ultimatum from the Fed and Treasury as well, before deciding to fold as well and be bought by Bank of America. John Thain must be thinking, umf'ers blind sided me... and bluffed me to lose my firm.

To be fair to the Fed, they are treading uncharted waters literally. They had to step in when the proverbial stuff hit the fan for LTCM. The trouble is the Fed and Treasury do not know what will be the implosion effects if AIG is left to fail, its really big.
The biggest bankruptcy in US history prior to Lehman was Worldcom with US$103bn, next came Enron with US$63bn, and then Conseco with US$61bn - all in 2001-2002. Even Refco which failed in 2005 was only a US$33bn thing.

Hence to allow Lehman to fail was already taking the Fed and Treasury to uncharted waters, Lehman was a US$639bn more than 5x the Worldcom bustup.
They saw the markets being able to absorb the failure of Lehman with relative little harm. But they don't know about AIG's impact. Plus, could the markets digest and take in two consequent huge failures?

They are not just staking their reputation here, but the well being of not just the US economy but global repercussions. Obviously the feedback from other central banks (esp Japan) was that many Japanese banks have huge exposure to AIG, and would have communicated that to the two bigwigs.
Lehman's failure also affected Lehman Japan which had US$37.5bn in liabilities, or 3.9 trillion yen. Looking at Japan's financial history, that was the second biggest failure after Kyoei Life which went bust in 2000 with liabilities of 4.5 trillion yen.

Hence Japan really could not really stomach another AIG related failure which may well result in a newcomer topping the list of failures in Japan.
At the end of the day, the Fed and Treasury could not open their cards when the lenders did not come through.

End result more toxic assets onto the Fed's balance sheet. I had written a scathing article questioning USD's strength over the last few weeks for this Saturday's paper. These events have basically reinforced and brought forward the demise of USD going forward.

For equity markets, the Fed's move would be greeted with a smile. Free markets people will frown. Life goes on.

p/s photos: Sandra Dewi


Ivan said...

Bro Dali,

Sound US market really cannot help .Most of the big and top finance company is transfering their asset and value from west to east.

ru40342 said...

Well i will still say fed action to bailout all those company was a absolute wrong and horrible result.

From macroeconomics term, bailout isn't the best move for economics as bailout mean inject liquidity to a cooperation and nationalize it.

Even our Malaysia leader knows that a nationalize company will never benefit a country as resources will be wasted and management quality will be relatively poorer.

The poison is in the economics but fed choose to temporary slow it down. Not only the disease or poison is not healed, it got bigger until finally the economy will burst and by that time, god knows what will happen.

Fed action on BSC, FRE, FNM, AIG will only make other company continue their risky and unhealthy investment as they know when there are trouble, fed is there for them. So they will continue to make silly decision on investment and guest what, the bubble grow bigger. Not only the housing market problem grow bigger, other financial market such as credit card market may on their way. Guest by that time when the commercial banks are in trouble, fed will bailout all of them and imagine what will happen then!

A lot of economist in the world strongly disagree with the move except those who involve heavily in stock market as their opinions are biased. I guest Ben Bernanke and Henry Paulson aren't rational anymore simply because they have to act "accordingly" to please the wall street rich man.

Freemason rules!!!

SecretGarden128 said...

Indeed, moral hazard. Now the real question is what's the benchmark for Fed to identify which corporate deserve bail-out, which not.

No one could delay the unavoidable - that's the econ principle 101. Nor should one try to mess with the invisible hand.No firm is 'too big too fail'.

Market will sort out itself.

Always have. Always will.

Ivan said...

Bro ru40342

Just wonder if FED and US Gov not give a hand to the market, I think the falling down on the market is more agreesive than current. no cut rate, no fund injection . . shall we see the djia. at level of 5000 now?

how about other region market? as i understand, the effect will be share among all country in global ..

what happen if WE are one of the employee of BS? Do we dream to have gov hand to help. hence, we can secure our job for survive. ..?

oops.. .all adi done. ..
just let market tell us the asnwer. . .which company shall be the next? no offense, sharing only

SecretGarden128 said...

Well, the credits must go to Paulson for lifting Treasury from nowhere to the undisputable No 1 adviser for US M&A, restructuring, debt arrangers by value on league table now!


AQW said...

DBS has become the 7th largest in the private wealth management as of 17th Sept....they don't know how to handle all the wealth.....hope DBS holds no AIG related papers..

solomon said...

Dear ru40342,

I do agree with most of your comments and I am no fan of bailout. But in circumstances right now, it is a matter of confidence Vs Resources utilization. I still favour Fed moves. If they do not act last couple of weeks (even though some said they are late), it will another Black Monday this week.

It all depends on the oncoming "financial hurricane" whether it breaks the nerves of the financial system. I rather to see slow deterioration than a heart-attack plunge. Once the confidence gone, the ripples effects are far fetched.

Frankly, economists are no crystal ball socceros who can foresee the economies doing. What they are doing are providing their opinions based on economic data and talks with people (no offence to all economists)? Toss the coin, you can hit either one side.

In crisis like this, you need a firm and visionalised leaders (something like a dictator). When the sheeps see the wolves, shepherd needs to lfend off the wolves and lead the sheeps to a safer place.

Tunku said...

Those who critcize AIG bailout have no idea what they are talking about Lehman is big but AIG is humoungous. AIG have assets of 1 trillion but its derivatives position is at least 50-100X that size. A failure would sent shockwaves around the world in every possible elite financial companies.

Butt said...

AIG is too inter-linked in the whole global financial system and its failure will definitely be very detrimental and will definitely push back significantly any possibility of economic recovery.

It will also affects the overall confidence within the economic system which is one of the critical element missing towards a recovery...

SecretGarden128 said...

Last count, the bailout has already costed US tax payers abt 905 Bn. Guess where are the funds coming from? Is this sustainable?

A nice article on dealbook that summed up what the AIG;s bail-out means for the US financial system.

In essence, we are seeing too many 'semi-strong' banks like BoA taking up smaller, weaker banks, creating more 'too-big-to-fail' financial institutions.

BoA has actually requested for a relax on its capital requirement i.e. more leverage to be allowed.

And long and short of it, ''the federal government the direct and indirect guarantor of the entire financial system and its investments. This doesn’t even take into account the myriad problems with the government running Fannie, Freddie and A.I.G. and also now being responsible for their performance. ''

Note how Barclays quickly swallowed up Lehman's US investment banking division for Us 250 Million (plus the 1.5 bn for the real estates).

Who is to say that no similar players could step in and rescue AIG if AIG file for bankrupcty? So the shock wave would be temporary, though acute

AIG themselves have just turned down offers from Allianz and JC Flowers 72 hours ago.

Anyway the crisis has spread to UK, with HBOS now in talks with Lyolds.

Expect more to come!

ru40342 said...

Those who said AIG is too huge to collapse is just like federal reserve.

Yes i agree AIG is very huge and powerful. Its failure may bring problems to the financial world and really bring us closer to "great depression 08".

But for me, we are technically in the "great depression 08" already. Like don harrold said the US economy is a desease. It will infect from a company to other company just like sars. the only way to get rid of it is to isolate it and make sure it doesn't get anywhere near before he is healed.

The fed action to bailout this problem company means give him some heavy drug so that he looks ok and heal even if it's not. Then let it continue to stay in the public to inject other company and finally the whole economy collapse!

If Fed continue their way of managing the economy like this(cut rate, bailout etc.), the US economy is gonna down and down hard.

Remember this, the main economy components is household, which mean average joe and jane, not rich and arrogant wall street trader and millionaire. I think Fed will find out very soon!

Good Luck!

Ivan said...

very dangerous. .. .
that is no other choice for US gov , fed to take a step to help AIG. . .even need cost more than US100b!

sound crazy ...
the more the fed need bail out, the more money, they need to use, the more money they will print, the rate will be cut from time to time. . . US depreciate, . . net GDP still -ve. .. so bad. . . effect all market. . but . . .

any +ve news come in?
really no way to help the market & finance company ?

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