Thursday, December 13, 2007
The Macropocalypse and the Bernanke Put
So...this is another important post. Read carefully if you're following the markets.
As it turns out, there is a Bernanke put, after all.
It's just better disguised than a Greenspan put.
Except it's far more pernicious:
If I've read the schedule correctly the "successful bidders" will be able to lodge toxic waste ABS as "collateral" for these loans. Triple A rated ABs, without verifiable market values, will receive 85 cents on the dollar. "Non AAA" ABS will receive 80 cents loan value on the dollar. This is many times what the ABX indices say this junk is worth.
Question. Is anyone aware of a bank failing to take back, i.e. re-purchase, securities they have lodged with the Fed? What a neat way of getting rid of your stuff that's maybe worth 25-35 cents on the dollar for 80 cents, just by pledging it as collateral and then failing to take it back at the expiry of the loan. A bailout in disguise???"
I've been hearing rumours of exactly this for a while now, so I'm fairly sure it's on the level.
Let me translate. The ABX indices (=the market) value the same (junk, subprime infected, etc) securities at (maybe) 30-40 cents on the dollar. But under Bernanke's plan, the Fed is willing to bid almost twice as much.
Don't get confused by the smoke and mirrors: that's a bailout by any other name
But one of the most myopic kind - because it doesn't fix the essential problems deep in the DNA of the banking system.
In fact, it amplifies the incentives for moral hazard, adverse selection, and other assorted flavours of evil.
Think about it this way. Cutting rates - the Greenspan put - levels the playing field, and makes money cheaper for everyone. That's toxic enough.
But the Bernanke put is even more toxic: beacuse, it seems, it's reserved only for a special few
. You or I can't offload our junk - but banks can.
In fact, it's you and me that the banks are offloading their moral hazard/junk onto. Who pays? You and me - the taxpayers. Unbelievably, we're bailing out the banks, and essentially retroactively paying the Street's bonuses.
Under the terms of the Bernanke put, Main St is subsidizing Wall St
That's not just unfair - it's suicidally close to cronyism.
I don't know what the Fed was thinking when it cooked up this plan. But it really is, as I said yesterday, the first horseman of the macropocalypse.
The fix is in - and it's going to, once the details sink in, shatter faith in the Fed as a neutral lender/arbiter/etc of last resort.
I think it's gonna begin the long-needed deconstruction of a global financial machine which is struggling to create real value.
Simple: if you think things are bad now - with banks failing to trust each other - just watch the fireworks when private banks begin failing to trust central banks
That game is fatal: it means either hyperinflation, hyperdeflation, or, quite possibly, both at once = stagflation.
And that's exactly where, unfortunately, the macropocalypse is going.
I'd be interested in whether you agree with the assumption that the market have fairly valued these assets, or may be over-reacting to the current "melt-down" in the sub-prime market (ABX assessing 30-35 cents on the dollar). Along that thread, I don't see how 2/3rds of all loans made in the residential sector are 100% write offs, but that's what the current market assumption leans towards well in advance of the actual write offs coming to default dates.
I don't want to fund bankers' enthusiasm, but I also don't want arb's getting 2x returns by accumulating these undervalued assets (by way of defaulting banks, see Citadel+E*Trade deal) which the Fed has mitigated with these floor rates.
Just covering the other side of the argument, I'm somewhere in the middle on this one = lots of folks at fault.
What would a meltdown = macropocalyspe's effect be on the average worker/family in different parts of the world? Will we all need to convert to local currency schemes(or create them) or start bartering with each other again? How will this play out if it reaches the bottom of the pit (whereever that is)?
// james burke // 4:27 PM
For these now are services that shall pay handsomely for the users and hosts thereof, whereas social networks and video hosts are failing while the LIBOR crumbles into disrepute". (London Interbank Overnight Rate)
And, so the President's of Vice fanned through the supplicant's reporting, and commented thus:
" Have you no Facebook, no twitter, or not even a mention of the moment?, he said for the group gathered?
I took my account of all that fell to my eyes, in view of all there, and saw, and saw, not just what was there, but what, to my understanding could have been manifest in due:
"I see, growing faint, that there are people carrying boxes and milk crates from their desks all about, while we here sip and sup, while the Demon bride lances furiously at a QUERTY on a bus in the Loop, we see that here before us there is an edifice about to fall - boxes they are carrying, don't you see, here before you, your friends and co-workers...!"
They looked at me appalled, and said, "and you, you will save like the Hebrew Messiah of Olde? To stir up insurrection rather than play to the ear of the Emperor? "
They then clamored about themselves, and said, "we had you here, at our gracious invitation, not to incite, but to lull the end of year fears!
I railed at the collected gathering while keep my voice civil;
"Our good coin is disgraced, while we wash each other's dishes, and sell to each other insurance, and as we cede the hard crafts and professions to who will someday dominate us all from the East.
...'Now what buys today a loaf, tomorrow buys a muffin, and if the Lords in your Assembly here hide from the truth, our coin will soon buy Nothing." An eerie echo filled the conference room without a call from your author truly:
"I say, the bill must be paid, whatever models you craft, must be justified, thus creating a value, a service good and well for all, besides the evil duplication of you all".
"To make a NEW THING, your legacy out here North and West, but a disgrace upon you, all who copy and echo and inflate with words, you will give away a legacy of gold."
"Heed my words, Lords of the Valley, create and truly innovate, and stop this foolish rally of the duplication of your models and the twittering of fools".
A bailout by any name is troubling, but this allowing this prolonged seizing in the credit markets to continue without any intervention might be worse. What Corys said has a lot of truth to it: Many of these assets are simply way too depressed and undervalued. Not every vehicle with mortgage exposure is, or should be, complete junk.
// spinchange // 3:11 AM
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