Monday, October 13, 2008

It has come to this...THE RED BADGE OF COURAGE

Things are so bad no one is even worried about moral hazard...

Remember that is where this whole thing STARTED with Bernanke and Paulson asking for $700 bln BOB (Bail out Bucks) with no strings attached. A plan that promised to be the mother of all moral hazard. ..

At the time no one thought that was a good idea. It was a nonstarter. But that plan helped to precipitate these events.

AND eventually as 'everyone' has come to see things as so terribly bad after huge losses on global stock exchanges finally bailouts without regard to 'moral hazard' are palatable.

It has some to this...
The UK: The UK has announced plans to place up to $63 billion into three institutions: Royal Bank of Scotland Group, and HBOS and Lloyds TSB Group, which are set to soon merge. In exchange for that help, Britain's Treasury is insisting that these institutions CANCEL dividends this year to have more funds on hand to lend.

Germany: Germany, a country that insisted its banks were not bads as America's banks with all those mortgage securities (because vee do not do real estate like zat) now is doing a bail out of 400bln EUROS (537bln DOLLARS) and some 80bln EUROS in capital injections. That's quite a switch from: " Vee Hass none of Zees Problams..."

Mean-vile Zee euro is in zee dumpster...
A broader deposit guarantee in Europe and the unlimited availability funds that the US is offering to the BNS, ECB and BOE assures funding of troubled banks in Europe. But only something more to the point like capital injections will remedy the issue over bank viability.

Sacre black and blue - the new colors of the euro-Zone
France: The French are expected to announce a plan that would provide up to $402.39 billion in needed funding through the end of next year, Le Monde reports.

Paulson was been soooo far behind the curve
Paulson is said by Barney Frank to have thought two weeks ago that the worst of 'it' was behind us. Frank (never above beating his own drum) says the power to inject capital was thrust upon the Treasury by Congress. Treasury did not think it was necessary and was wary of using that power. Now that power might save the system.

Meanwhile, back at the ranch...

Anointing the banks, ignoring borrowers the RED BADGE of COURAGE
Note that the Treasury presentation this morning by Interim Assistant Secretary for Financial Stability Neel Kashkari went on and on about what is being done FOR BANKS with one 'throw away line' at the end about trying to keep people in their homes.' The newest wrinkle in bank aid is that capital will be injected in a way that does not harm existing shareholders- this is a 180-degree shift from prior policy. It says MORAL HAZARD BE DAMNED. Moreover, the plan for capital injections is aimed at HEALTHY banks. Participation in the programs will probably come to be viewed as an anointment by the government as being a GOOD BANK. A veritable RED BADGE OF COURAGE. For those excluded? Good luck!

I particularly like the RED BADGE OF COURAGE comparison because in the story the soldier's wound was self-inflicted.

Meanwhile: Fiddle Dee Dee, homeowner.

The Treasury is focused on the existing STOCK of assets and the problem that their weak and weakening prices means for banks and has so far spent little effort on comfort to the troubled housing market itself.

But then there is this report:
Federal regulators are now directing Fannie Mae and Freddie Mac to start purchasing $40 billion a month of under-performing mortgage bonds as the Bush administration expands its options to buy troubled financial assets. F&F began notifying bond traders last week that each company needs to buy $20 billion a month in mostly sub-prime, Alt-A and non-performing prime mortgage securities (the plans are still confidential; but some have spilled the beans). So now the government is buying the worst of the worst of the worst and thereby encouraging banks to generate more of the same...apparently. The purchases would be separate from the U.S. Treasury's $700 billion mandate and would come under the Fed's operating of Fannie and Freddie. This will help banks. Possibly it will help with new originations but it is NOT a help to homeowners with mortgage value in excess of their house price. But it does have some anti-further-weakness effect as it will encourage banks to keep lending and to sell the resulting loan product to F&F.

and in the end...
Until the capital infusions are made or the auctions to lift bad paper from the balance sheet are conducted questions about banks will linger. New names keep coming up. RBS is being seriously bailed out in the UK and Sovereign Bank, in the US, appears to be about to become part of Spanish bank, Banco Santander. Some of the names that have been problems names in interbank lending are being revealed in this way. As to the efficacy of the remedy, all we know is that something is coming and it may be good (sufficient). But the steps to help BOOST housing prices and to stop or mitigate further erosion in the housing sector or arrest the trend to more foreclosures still has not really been assembled. That still needs to be an important part of the plan.

Big Chill
Help the 'man on the street' while that expression is still a euphemism and before he is actually living there in the box his refrigerator came in..

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