 |
|
|
|
 |
September 19, 2008 Stock Market Applauds U.S. Government Plan
Bottom Line |
 |
What a week this has been. By Wednesday evening, it was clear that systemic
risk had frozen interbank lending and parts of the credit-default market,
moving well beyond the problems associated with illiquid mortgage-related
instruments. The demise of Lehman Brothers alone was bad enough, but once AIG
was downgraded and unable to come up with the necessary collateral to stand by
its credit-default swaps (CDS), it was feared that the collapse of AIG could
bring the whole market down. The Fed had no choice but to step in with an $85
billion loan (offered at punitive rates). Both Lehman and AIG have been major
players in the CDS market, essentially insurance against default on assets tied
to corporate debt and mortgage securities.
Another key development was the run on money market mutual funds (MMF), a
$3.4 trillion market globally or a third of the S&P 500’s market cap.
The run began when a holder of Lehman paper, Reserve Primary Fund (RPF), was
driven to “break the buck”, valuing the fund at 97 cents on the
dollar. RPF had roughly 1%-to-2% of their assets in Lehman paper. Investors
pulled a record $89.2 billion from money-market funds on Sept. 17. Had AIG been
allowed to fail, bank and mutual fund exposure would have exacerbated the
already-bad situation. MMFs have no deposit insurance, so the panic run was not
surprising.
In addition, stock prices of Morgan Stanley and Goldman Sachs continued to
fall sharply on Thursday morning, driving MS to look for additional capital and
seek a merger partner. In this rapidly worsening environment, the solution
could no longer be piecemeal. Stock markets rebounded very sharply Thursday
afternoon with the welcome news that the Congress would consider a massive
government bailout.
The Fed and the Treasury met with a bipartisan, bicameral group of senior
Congressmen Thursday evening and announced they would be working through the
weekend to develop measures that would represent the biggest intervention in
financial markets since the 1930s, recognizing the need for a comprehensive
approach to the financial crisis after a series of ad hoc rescues. At the core
of the plan is the creation of a new entity that would buy the bad assets of
solvent financial firms at a steep discount and eventually sell them back into
the market or hold them to maturity. This is not the same as the Resolution
Trust Corp (RTC) established in 1989 during the savings and loan crisis. The
RTC held the assets of failed institutions, selling them off by 1995.
The details of the program have yet to be hammered out, but in the meantime,
the SEC banned short-selling of a list of 799 financial stocks for 10 days,
until October 2, although it could be extended to 30 days. Similar actions were
taken in the U.K. Also, the FDIC reserve fund was greatly enhanced.
Immediate relief will come in the form of Fed and Treasury measures to
provide liquidity. The Fed will extend loans to banks to purchase
“high-quality” asset-backed commercial paper from money market
funds; the loans will be at the discount rate, currently 2.25%. The U.S.
Treasury separately said today it will use as much as $50 billion from the
government’s Exchange Stabilization Fund to temporarily protect investors
from losses on money-market funds. The Fed also said today it will buy
short-term discount notes issued by Fannie Mae, Freddie Mac and the Federal
Home Loan Banks “to further support market functioning.” The New
York Fed will conduct the purchases of debt through “competitive
auctions” over the “next several weeks.”
In addition, in a press conference today, Treasury Secretary Paulson
announced that Fannie Mae and Freddie Mac would increase their purchases of
mortgage-backed securities (MBS) and the Treasury will expand its MBS purchase
program to cover some of the securities that do not meet Fannie and Freddie
requirements.
These moves were welcomed by stock markets all over the world, but it
remains uncertain if they will be a long-term solution to the complex and
opaque problems confronting the global financial system. As well, it may not be
enough for the U.S. alone to take action. Certainly there are a number of
troubled European financial institutions, which might lead the Bank of England
or the ECB to consider a similar program.
Prime Minister Harper said this morning that no bailout plan is being
considered for Canadian banks. Without doubt, the financial firms in Canada are
much stronger than many in the U.S. and the rest of the world; even so, our
financial sector stocks have sold off in the past year linked, at least in
part, to losses in U.S. mortgage-related products, Lehman debt and
credit-default swaps. The freeze of nonbank ABCP is an example of the Canadian
fallout from the global credit crisis.
The Bank of Canada has added liquidity to the markets here as needed, and
the Fed arranged a U.S. dollar swap line with the Bank this week as part of a
global central bank offer of an additional $180 billion of credit to financial
institutions in the overnight market. This helped to reverse some of the rise
in the cost of overnight interbank funds compared to Lilliputian short-term
government yields, but those spreads are still high by historical
standards.
There are so many questions yet to be answered about the emergency plan; for
example, will the new agency purchase bad assets from hedge funds, mutual
funds, pension funds and other managed investment pools? How about from the
financial subsidiaries of nonfinancial companies such as GE, whose stock price
had fallen sharply? GE was not on the list of ‘short-curbed’
stocks; however, some have reported that it will be added to the list. What
about the U.S. subsidiaries of foreign financial institutions; will their bad
assets be purchased as well? Will off-balance sheet assets such as SIVs be
addressed?
Another set of questions regard the price that will be paid for these bad
assets: how will the government value the assets they take on their books? The
government will want to be at arm’s length in this process, so some sort
of auction facility might be created. Presumably the prices will be deeply
discounted.
These actions are not a panacea, as financial institutions will be taking
big losses. Mr. Paulson promised a “comprehensive” solution
that would deal with “the souring real-estate and other illiquid assets
at the heart of the financial crisis.” The goal is to strengthen
confidence so that financial institutions can resume business as usual and
markets can function fully, easing credit stringency and improving liquidity so
that credit-worthy borrowers can get loans and credit spreads will narrow.
These are only the first steps.
Secretary Paulson acknowledges that the regulatory structure in the U.S. is
“suboptimal,” to say the least. A major revamp of the regulatory
bodies and regulations themselves will follow, which could have an enormous
impact on the value of financial firms and the viability of financial business
models. There is real doubt that the stand-alone investment banks in the U.S.
will garner the stock price multiples and returns-on-equity of the past. If
hedge funds are regulated and leverage is restricted, outsized gains might well
be limited in the process of protecting against outsized losses. The same is
true for other non-banks such as private equity firms. Regulators have said
they will be restricting the leverage of all financial firms. To be sure, the
regulatory environment will be more restrictive, preventing the excessive
leverage and debt accumulated over the past 5 years or so. The SEC rules
prohibiting naked shorts may well be broadened and enforced. Already yesterday,
a number of the largest pension funds in the U.S. stopped lending their
holdings of Morgan Stanley and Goldman Sachs to short sellers.
Setting up a clearing house for CDS to improve transparency will certainly
be required. The seventeen dealers in the CDS market have already agreed to
form a clearinghouse, create a system to better manage the collateral that
protects trading partners from losses and tear up offsetting contracts to
reduce the number of positions that banks have to oversee.
At least three things need to happen to bring the credit crisis to an
end:
- Financial institutions and others have to ‘fess up to their mistakes
by selling distressed assets (to the government), much of which was bought with
borrowed money.
- They need to reduce leverage.
- They need to rebuild their capital cushions, which have been eroded by
losses on those distressed assets and subsequent erosions in asset values generally.
Deleveraging is well underway for financial firms and for the household
sector. A restoration of confidence in the financial system will stem
withdrawals and redemptions, attract new deposits and investment dollars and
enable financial institutions to rebuild capital.
|
|
|
 |
 |
 |
 |
|
|
June 19, 2010
China Loosens Currency Peg
In a surprise announcement on Saturday, the People’s Bank of China
(PBOC) announced it would break the 23-month fixed peg in the yuan MOREJune 18, 2010
Fed Easing Coming?
The U.S. economy is losing momentum and price pressures continue to fall MOREJune 10, 2010
Err on the Side of Ease
The move toward worldwide fiscal restraint runs the risk of weakening the economic recovery MOREMay 14, 2010
Global Credit Crisis Morphs Into a Global Debt Crisis
With the onslaught of the credit crisis in the fall of 2008, every country in the G20 agreed to stimulate their economies by boosting government spending and/or cutting taxes MOREApril 23, 2010
U.S. Pessimism is Overblown
There is just too much pessimism in and regarding the U.S. these days MOREApril 16, 2010
Productivity Gap Misleading
The record productivity gap between Canada and the U.S. has generated much handwringing MOREMarch 26, 2010
Health Care Reform Needed in Canada
Ironically, while the U.S. is going through the excruciating process of developing a more broadly available health care system, Ontario is working to reduce government provisions to hospitals in an effort to balance the budget MOREMarch 24, 2010
Fed Decision Making—Why New Appointments to the Fed Don’t Really Matter
According to media reports, President Obama is poised to name economist Janet Yellen to be Vice Chair of the Federal Reserve Board MOREMarch 23, 2010
Canada's Disturbing Productivity Performance
The Canadian economy has clearly pulled out of recession with 5% growth in the fourth quarter and good momentum heading into this year MOREMarch 12, 2010
The U.S. Foreclosure Crisis
Without doubt, the U.S. economy is showing signs of significant recovery in many sectors and regions MOREMarch 2, 2010
Canadian Calm in a Turbulent Sea
Canada’s domestic economy has rebounded strongly from the financial crisis and global recession MOREJanuary 26, 2010
Don't Rock the Boat
Now more than ever, the biggest risk to sustained recovery is the political response to the fallout of the financial crisis and its impact on consumer and business sentiment MOREJanuary 22, 2010
U.S. Labour's Lost Dynamism
For a generation that was known for its job-hopping and entrepreneurial spirit, boomer kids—now in their twenties and thirties—are suffering from significant career malaise MOREJanuary 8, 2010
The End of the Bull Market in Bonds?
Even the most bullish bond fund managers will admit that, in time, U.S. government bond yields will head higher MOREDecember 9, 2009
The Tax-Free Savings Account Is a Real Winner
In a surprise addition to the 2008 federal budget, the Tax-Free Savings Account (TFSA) was born MOREDecember 8, 2009
The Clouds Really Are Parting
The much-better-than-expected November employment numbers for Canada and the United States confirmed that the recession has ended and the recovery is underway MOREDecember 4, 2009
China Scolds Western Leaders
China has been flexing its muscles a lot lately MORENovember 13, 2009
Let's Cut a Deal
The falling U.S. dollar is grabbing enough attention these days that the Chinese authorities are signalling they will consider allowing their currency to edge upward once again MOREOctober 22, 2009
Sherry Cooper Takes Questions from the Globe and Mail
Dr. Cooper joined a forum at the Globe and Mail’s web site to take your questions about small business and the recession. MOREOctober 15, 2009
The U.S. Dollar’s Decline Is Not Such a Bad Thing
Many have suggested that the fall in the U.S. dollar is reflective of the sad state of American economic affairs replete with surging budget deficits, profligate consumer spending, overleveraged banks, enormous current account deficits and an increasing reliance on foreign capital inflows to finance the overspending MOREOctober 2, 2009
Remaking the Retirement Plan, Post-Crisis
Well before the financial crisis and recession, the traditional concept of retirement was outmoded MORESeptember 18, 2009
U.S. Job Woes: Canada 1990s Redux
There is a new kind of unemployment in the U.S.—long duration structural unemployment MORESeptember 11, 2009
Pain Not Over Yet
By now, it is pretty obvious that the financial crisis is behind us and the global economy is experiencing a synchronized recovery MORESeptember 9, 2009
Unbelievable
An article in today’s Wall Street Journal highlighted the possibility of the Chinese Investment Corporation (CIC)—the sovereign wealth fund responsible for investing roughly $300 billion (and growing) of China’s foreign exchange reserves—investing in U.S. commercial real estate which is already down roughly 35% from its peak MORESeptember 4, 2009
Who's Doing All of the Saving?
Are households rebuilding their savings in the wake of the economic and financial collapse or is the rise in savings, measured as a residual in the national income accounts, merely a statistical illusion? MOREAugust 28, 2009
Upward Revision in Q3 U.S. Growth
We are revising upward our forecast for third quarter growth in the U.S. by
a full percentage point, from an estimated 2.8% to 3.8% MOREAugust 21, 2009
An Irresistible Opportunity for Successful U.S. Fiscal Stimulus
While everyone knows that the American consumer has been the weak link in
this recovery, in one sector the fiscal stimulus has opened consumer wallets MOREAugust 17, 2009
Strengthening Canadian-Chinese Ties
In the wake of the global recession and the plunge in the Canadian trade balance to a deficit position, Canada is working hard to strengthen business ties with Brazil, Russia, India and China, or the so-called BRIC countries MOREAugust 12, 2009
As Expected, No Fed Policy Change
The Fed is more optimistic about the economic outlook than it was in late June MOREJuly 24, 2009
Pain Not Over Yet
Since 2007, with the beginning of the U.S. housing meltdown and the ensuing financial crisis, there has been a global decline in private sector spending, a dramatic shrinkage in global trade and an unprecedented spike in government spending MOREJuly 17, 2009
The Painful Process of Deleveraging
The U.S. credit bubble in the 1990s through 2007 enabled a tremendous amount of consumer and business over-spending MOREJuly 10, 2009
Let's Get Real
Many fear that mounting deficits and debt will trigger inflation in the
future and call for a Fed exit strategy; others are now clamouring for
additional fiscal stimulus MOREJuly 2, 2009
Employment and the Fed
Those who have been calling for a Fed exit strategy from the extraordinary degree of monetary ease should be silenced by the June employment results MOREJune 8, 2009
Post-Crisis Withdrawal
As financial markets heal, banks are shying away from government assistance, betting that they can rely fully on the markets to build capital positions MOREJune 5, 2009
Worst Is Behind Us
Signs of improvement in the U.S. housing market, rising consumer confidence and a rally in financial stocks in the U.S. and Canada suggest that the economies are bottoming and the worst of the financial crisis is behind us MOREMay 28, 2009
Bet You Things Are Better Than You Think
There is increasing reason to believe that the worst of the financial crisis is behind us and the U.S. and global economies are bottoming MOREMay 15, 2009
Running the Printing Presses to Fund the Deficit
Many are concerned that, despite today’s very weak April CPI reading of ‑0.7% year-over-year, the huge monetary and fiscal stimulus in the U.S. will ultimately debase the currency MOREMay 3, 2009
Swine flu threatens to kick economies when they are down
In the midst of the longest and perhaps deepest global recession in the postwar period, the last thing we need is rising protectionism, travel advisories and reduced business and consumer activity MOREApril 29, 2009
Fed Still Adding Juice
Although the Fed announced no new initiatives today, clearly the tone of the
press release suggests that the Fed will continue to support previously
announced credit easing and expects to do so “for an extended
period” MOREApril 27, 2009
Swine Flu: Let's Not Get Carried Away
My phone has been ringing off the hook this morning with media requests to discuss the economic implications of a swine flu pandemic MOREApril 24, 2009
Investing Is No Longer Child's Play
The Bank of Canada made it clear this week that our economy is contracting far more than they earlier expected MOREMarch 25, 2009
Future of Finance Conference
The Who’s Who of finance descended upon Washington, D.C. Monday
for 24 hours of policy analysis MOREMarch 18, 2009
More Good News
Bernanke is the man, clearly the best spokesperson for the Obama
administration, raising his odds of reappointment this summer MOREMarch 13, 2009
Finally, Some Good News
No doubt about it, the Canadian employment nosedive in February is bad news, but it is bad news that is in lagged response to what has already been happening around the world MOREMarch 11, 2009
More Signs of Hope Needed
We are in a negative-news cycle, to say the least, and it is difficult to see a near-term end to it based on incoming data, heated policy debates and wealth-obliterating market activity MOREFebruary 27, 2009
A More Prudent Society
It has now been publicized around the world just how strong our banking system is in Canada MOREFebruary 5, 2009
The Demonization of Banks
The global financial landscape is changing rapidly and perhaps nowhere more
so than in the U.S. MOREJanuary 30, 2009
Can You Count on Dividends?
In the U.S., the answer is certainly no. MOREJanuary 28, 2009
Fed Does Not Dispel Confusion
The Federal Reserve just wrapped up its first policy meeting of the New Year MOREJanuary 27, 2009
The Advil Budget
The 2009 Canadian budget is chock-full of government spending and
rather light on the side of tax cuts, but the truth is that domestic
fiscal stimulus can only ease the pain of the global recession and credit
crisis MOREJanuary 23, 2009
Deflationary Forces Accelerate
Layoffs and reductions in hours worked have been accelerating in recent months and cover firms in virtually every sector of the U.S. economy. MOREJanuary 9, 2009
Recession Worsens
The latest jobs data signal that the year-long U.S.
recession is worsening and the Canadian recession is moving in with full
force MOREDecember 18, 2008
One Major Lesson
One major lesson learned in 2008 is that financial losses spill quickly into
the real economy MOREDecember 16, 2008
Fed Slashes Rate to 0-to-25 bps Range; Historic Use of Fed Balance Sheet to Ease
The Federal Reserve has every reason to ease aggressively and it certainly did MOREDecember 5, 2008
Forget Old-Time Fiscal Stimulus
With today's dismal employment report, there is no doubt that the Canadian economy is in recession and the U.S. contraction is accelerating MOREDecember 3, 2008
Tough Times, Aggressive Actions
There is growing evidence that the global economic slump is deepening and that consumer and business access to credit is shrinking. MORENovember 21, 2008
Urgent Action Needed
Canadians have been far too sanguine thinking that we would be cushioned
from the crisis in credit and the global recession MORENovember 15, 2008
GM Bailout - Part 2
Yesterday, in a note to clients, I acknowledged that there are two sides to
the GM-bailout controversy MORENovember 14, 2008
Should the U.S. Government Bail Out GM?
Washington is currently struggling with the issue of whether or not to bail
out the domestic auto industry, most immediately, GM. MORENovember 6, 2008
Recession Darkens
With the U.S. election behind us, markets are focussed on the serious
negative impact the financial crisis had on the economy since late September MORENovember 5, 2008
National Catharsis
President-elect Barack Obama has won a decisive victory, drawing support
from all regions of the country and all segments of the population MOREOctober 16, 2008
The Consumer Recession
The sizable decline in stocks in the past two days reflects the growing
awareness that the U.S. economy is going into a deeper and more protracted
recession than expected MOREOctober 10, 2008
Paulson and the G-7 Do the Right Thing
U.S. Treasury Secretary Hank Paulson just announced that the TARP would be
buying not only troubled bank assets, but will also infuse capital into banks
and other financial firms directly MOREOctober 10, 2008
More Action-Crisis Intensifies
All overnight indicators suggest that the crisis is intensifying despite ballooning rescue efforts by governments all over the world MOREOctober 9, 2008
The Wealthy Boomer interviews Sherry Cooper
Jonathan Chevreau of the National Post interviews Sherry Cooper on her book, The New Retirement. MOREOctober 8, 2008
Global Rate Cuts... Finally!
In the face of intensifying financial market turmoil, major global central banks swooped in this morning with an unprecedented coordinated interest rate cut. MOREOctober 7, 2008
Unbelievable Complexity
The Fed and Treasury will do whatever it takes to unfreeze credit markets. MOREOctober 1, 2008
Quarterly Web Cast and Dividend Stock Screen
Sherry's latest web cast, and the latest update of the dividend stock screen featured in Sherry Cooper's book, The New Retirement MORESeptember 26, 2008
Economists Weigh In
There is nothing I could write at this moment that might not be superseded by events in the next few hours. MORESeptember 19, 2008
Stock Market Applauds U.S. Government Plan
What a week this has been. MORESeptember 16, 2008
No Rate Change, Easing Bias
In a unanimous decision, policymakers did not cut the benchmark fed funds rate, despite the market’s call for an easing move. MORESeptember 15, 2008
Fed Widens Collateral
Judging from my press calls early this morning, there appears to be a good deal of opacity in what the Fed has said regarding a broadening of the collateral it is willing to hold on short-term emergency loans to primary dealers. MORESeptember 14, 2008
Wild Day Tomorrow
Unfortunately, as of 4:00 p.m. today (Sunday) the news on an orderly takeover of Lehman Brothers does not look good. MORESeptember 11, 2008
Recovery Still a Year Away
With continued financial instability and the deceleration in global growth, Canada's economy has slowed and the TSX has fallen sharply on the heels of commodity price declines. MOREAugust 29, 2008
The New Cold War
Russia began the latest flexing of its political and economic muscles as China, with the Beijing Olympics, was about to begin its triumphant coming out party. MOREAugust 22, 2008
Hedge Funds Face Shock Waves
Things are tough and getting tougher in the hedge fund (HF) business. MOREAugust 7, 2008
Fed Policy Tighter than Normal at 2% Fed Funds
While the Fed decided to leave its benchmark interest rate at 2% this week, well below the level suggested by the Taylor Rule, credit conditions in the U.S. are much tighter than this rate would suggest. MOREAugust 1, 2008
Obama Just Found His Middle-America Appeal
With Obama still running behind McCain in the industrial heartland, among both male and female voters in states such as Pennsylvania, Ohio and West Virginia, news widely reported today that Wal-Mart has formally and officially informed managers that a vote for the Democrats is a vote for unionization will not sit well with America’s traditional middle class MOREJuly 18, 2008
A Global Presidential Campaign
What better evidence is there that globalization is real and permanent than the foreign trips of both presidential candidates? MOREJuly 15, 2008
Crisis Widens
The U.S. financial markets and the U.S. economy are in crisis and the ramifications for the rest of the world are enormous MOREJuly 7, 2008
Next Shock: Currency Crisis?
The malaise of the U.S. economy is palpable MORE
|
|
|
|
|
|
|
|
