Release Date: August 17, 2007
For immediate release
To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points. The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco.
King of the Birds, Lord of the Skies
Gather ye rose buds while ye may, old time is still a flying;
and this same rose that you see today, tomorrow will be dying.
CarpeDiem: Seize the Day!
- Dead Poets Society
Friday, August 17, 2007
Too Much...Simple Anatomy of a MeltDown!
We are in the midst of a financial crisis. This is Not a correction; Not a downturn. Not a slump. Not a blip. I think this is a full-blown meltdown. And the causes? Too much….
Too much housing speculation:
The Federal Reserve pumped the economy full of easy money after the tech bubble burst. That money found its way into the housing market, fueling a speculative bubble like no other in modern U.S. history. Now that bubble is popping, too … and the fallout is spreading throughout the financial markets.
Too much stupid lending:
Residential mortgage lenders gave loans to any moron with 2 legs during the boom. Now, delinquencies & foreclosures are surging, & so are loan losses. Stupid lending wasn't confined to home mortgages, either. The commercial mortgage & leveraged buyout markets have seen their fair share of excesses. Concern over these higher-risk loans is now hammering Wall Street.
Too much financial leverage:
Hedge funds, Wall Street firms, everyday speculators — they all borrowed huge amounts of money to boost returns. But what happens when the investments head south? All that leverage enhances LOSSES.
So, in a nutshell, reckless investors, lenders, & borrowers gambled with easy money & lost. The result is the unfolding meltdown you're seeing in the corporate bond market … the mortgage bond market … the stock market … virtually everywhere. It's not pleasant. It's not fun. And, from everything I see, it's not over. But you shouldn't be surprised by any of this.
The tell-tale signs of financial panic began weeks ago. Since then, I'm sad to say, things have only deteriorated further. Almost every single day, we learn of another mortgage company facing funding problems or another lending market getting roiled.
For example, you heard of Countrywide? Actually I just got to knw about this company recently. Countrywide Financial (CFC) is the largest mortgage lender in the U.S.. She recently experienced a bout of funding turmoil. The company reportedly had trouble selling a form of short-term debt called commercial paper. It tapped into an $11.5 billion credit line to raise money instead.
Countrywide's bond holders are worried about a potential default. I can see why: Fitch Ratings & Moody's Investors Service both cut Countrywide's credit ratings. And one Merrill Lynch analyst went so far as to say the lender could be forced into bankruptcy. The stock has plunged as a result, leaving it down about 55% year-to-date!
Meanwhile, a Canadian firm called Coventree Inc. announced that the market turmoil has prevented it from selling asset-backed commercial paper (ABCP). This ABCP is a form of short-term debt backed by things like car loans, credit card receivables, & mortgages. Problem is, the company is the biggest non-bank issuer of this kind of paper in Canada, & it needed more than $700 million in emergency funds because of the problems. Other firms — at least 16 according to Canadian ratings company DBRS — are having similar issues. That's a sign of a real liquidity freeze!
Now, elsewhere, the London Interbank Offered Rate (LIBOR) just surged to its highest level since 1998. This kind of move indicates that banks are scared to lend each other money even on a very short-term basis.
At the same time, yields on three-month U.S. Treasury bills plunged almost three-quarters of a percentage point (72 basis points) at one point yesterday. That was the largest decline in any one day since the stock market crashed in October 1987! Even in the immediate aftermath of the 9/11 terrorist attacks, yields fell only 39 basis points. That means the financial panic we're seeing now is even worse than we saw in September 2001!
Clearly, the housing market is still slumping. The National Association of Home Builders just released its latest monthly survey of builder sentiment. The overall index sank to 22 in August from 24 in July. That was below the 23 expected by analysts & the worst reading in any month since January 1991, when the index touched an all-time low of 20.
I think we're in for a 1998-style rout … and that means further declines are likely. But then again, I could be wrong. I sometimes can and will. So do your own research. Bottom line: These are dangerous times — and you should take steps to protect yourself.
Too much housing speculation:
The Federal Reserve pumped the economy full of easy money after the tech bubble burst. That money found its way into the housing market, fueling a speculative bubble like no other in modern U.S. history. Now that bubble is popping, too … and the fallout is spreading throughout the financial markets.
Too much stupid lending:
Residential mortgage lenders gave loans to any moron with 2 legs during the boom. Now, delinquencies & foreclosures are surging, & so are loan losses. Stupid lending wasn't confined to home mortgages, either. The commercial mortgage & leveraged buyout markets have seen their fair share of excesses. Concern over these higher-risk loans is now hammering Wall Street.
Too much financial leverage:
Hedge funds, Wall Street firms, everyday speculators — they all borrowed huge amounts of money to boost returns. But what happens when the investments head south? All that leverage enhances LOSSES.
So, in a nutshell, reckless investors, lenders, & borrowers gambled with easy money & lost. The result is the unfolding meltdown you're seeing in the corporate bond market … the mortgage bond market … the stock market … virtually everywhere. It's not pleasant. It's not fun. And, from everything I see, it's not over. But you shouldn't be surprised by any of this.
The tell-tale signs of financial panic began weeks ago. Since then, I'm sad to say, things have only deteriorated further. Almost every single day, we learn of another mortgage company facing funding problems or another lending market getting roiled.
For example, you heard of Countrywide? Actually I just got to knw about this company recently. Countrywide Financial (CFC) is the largest mortgage lender in the U.S.. She recently experienced a bout of funding turmoil. The company reportedly had trouble selling a form of short-term debt called commercial paper. It tapped into an $11.5 billion credit line to raise money instead.
Countrywide's bond holders are worried about a potential default. I can see why: Fitch Ratings & Moody's Investors Service both cut Countrywide's credit ratings. And one Merrill Lynch analyst went so far as to say the lender could be forced into bankruptcy. The stock has plunged as a result, leaving it down about 55% year-to-date!
Meanwhile, a Canadian firm called Coventree Inc. announced that the market turmoil has prevented it from selling asset-backed commercial paper (ABCP). This ABCP is a form of short-term debt backed by things like car loans, credit card receivables, & mortgages. Problem is, the company is the biggest non-bank issuer of this kind of paper in Canada, & it needed more than $700 million in emergency funds because of the problems. Other firms — at least 16 according to Canadian ratings company DBRS — are having similar issues. That's a sign of a real liquidity freeze!
Now, elsewhere, the London Interbank Offered Rate (LIBOR) just surged to its highest level since 1998. This kind of move indicates that banks are scared to lend each other money even on a very short-term basis.
At the same time, yields on three-month U.S. Treasury bills plunged almost three-quarters of a percentage point (72 basis points) at one point yesterday. That was the largest decline in any one day since the stock market crashed in October 1987! Even in the immediate aftermath of the 9/11 terrorist attacks, yields fell only 39 basis points. That means the financial panic we're seeing now is even worse than we saw in September 2001!
Clearly, the housing market is still slumping. The National Association of Home Builders just released its latest monthly survey of builder sentiment. The overall index sank to 22 in August from 24 in July. That was below the 23 expected by analysts & the worst reading in any month since January 1991, when the index touched an all-time low of 20.
I think we're in for a 1998-style rout … and that means further declines are likely. But then again, I could be wrong. I sometimes can and will. So do your own research. Bottom line: These are dangerous times — and you should take steps to protect yourself.
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