They're at it again!

Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.

The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all wanted it and they say thanks, BTW; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending by the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.

This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.

On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It's a step in the right direction and prevents things from getting worse.”

Worse than what; these actions reveal a previously unthinkable level of desperation.
Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).

Ordinarily, an increase in the money supply of this magnitude would be highly inflationary. However, the magic of the multiplier effect doesn’t happen until the money is lent out. So far, there’s little evidence that this has happened. Banks continue to hoard cash to cover anticipated losses and writedowns. Take a look at the Baltic Dry Index, which is a proxy for international shipping and manufacturing. Its recent cliff dive is partially due to shippers’ inability to get banks to accept letters of credit from other banks. Individuals have stopped out-of-control consumption. Take a look at this month’s Consumer Confidence Index. It’s at 38, the lowest level on record.

Try as the Fed might, deflationary forces remain stronger than the inflationary kind.

mg

Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.

The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all want it; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending from the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.

This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.
On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.

“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It's a step in the right direction and prevents things from getting worse.”

Worse than what; these actions reveal a previously unthinkable level of desperation.
Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).

The Stock Market Crash: Ahead of Us or Behind Us?

Today’s reverse crash resulted in the Dow up $889.35 to close at $9,065.12. From peak to recent trough, the Dow has moved from its all-time high of $14,164 on October 9, 2007 to a low of $8,176 on October 27, 2008. That’s a decline of $5,988 or 42%. It earned back about 10% of that today.

So, let’s try to figure out what caused all this exuberance and determine if it’ll hold.
Over the weekend it was reported that emerging markets’ debt, currencies, and stocks are crashing, a series of events that the US will be relatively unscathed by, for a change. **not much bearing on the Dow unless there’s more to this story, but go on**

Then there was the Washington Mutual CDS auction, which settled at 57 cents with less than a billion of net open interest. One way or the other, the counterparties are good for it; the Fed will give them the money. **under the radar, next**

OK, this is a biggie: the commercial paper market unfroze. The Fed has invoked Depression era power to buy short-term debt directly from issuers. Yesterday, companies sold a record of $232 billion in commercial paper, of which a record $67.1 billion was out 80 days or more, compared with a daily average of $6.7 billion last week, according to Fed data. This is good news since it’s frequently the inability to obtain short-term funding that pushes companies into bankruptcy. **now you’re talking, two thumbs up**

However, there’s a little catch. **uh oh** According to Adolfo Laurenti, a senior economist at Mesirow Financial Inc. “The central bank probably absorbed about $60 billion out of the $67.1 billion of total 80+ day paper.” Also of interest is that General Electric, the largest issuer of commercial paper and the parent company of CNBC, sold commercial paper as “a test” and a “show of support” for the Fed’s program. Another first, The Korea Development Bank, borrowed directly; however, it did not beat around the bush making lame excuses, it just needed the money. It now has a line with the Fed for $830 million. **this casts a different light on the term “unfreezing” but go on**

No, none of these are big enough to turn around the crisis. Au contraire, upon second glance, the commercial paper thing could be a negative. The root cause of this crisis, from the standpoint of the US, is derivatives counterparty risk and that’s where there could be big change. **now you’re talkin’**

From Bloomberg, ever at the ready: “The Federal Reserve has given US futures exchanges until Oct. 31 to present written plans on how they'll make the $55 trillion credit swaps market less risky . . . The Fed is pressing the industry to set up a central counterparty that would absorb losses should a market maker fail, a step that might have avoided last month's bankruptcy of Lehman Brothers Holdings Inc.” **they should have thought of this sooner** But wait, who will absorb the losses when a counterparty fails? No one has said, so I guess it will be the Fed then, who else.

And now, for those still with me who are dying to learn the answer to the question, is the stock market crash ahead of us or behind us—the answer is . . . ahead of us.

mg

What if Insurance Companies Don't Pay?

Let’s hope your policy is with an insurance company that has ruinous trading losses and heavy exposure to derivatives. That’s what it took for AIG to be rewarded with a direct government bailout.

In something of a creative interpretation of the mandate given by Congress to continue funding the so-far-failed bailouts of banks, Bloomberg reports on Oct 24: “The Treasury is considering taking stakes in insurers . . .” which “would widen the scope of Secretary Paulson’s Troubled Asset Relief Program (TARP) as the credit crisis deepens. “Capital adequacy has been a major concern among investors” in insurance companies, said Morgan Stanley analyst Nigel Dally. “If the Treasury were to purchase preferred equity stakes in some insurers, it would help calm these concerns.''

Purportedly, insurance companies, primarily life so far, have approached the Treasury for direct investment, or in the vernacular, a bailout. As would be expected in their line of work where the welfare of others is a hallmark of their business model, they want all life insurers to be on the receiving end of the government’s largesse. The reason, the companies state, is to lessen the embarrassment, or to cover up*, or to fool the public, if you will, for the few that actually need an investment, or bailout, and have been turned down, or laughed at, or shunned by private investors. (*The actual term used was cover up. I’m not making this up, just ask Jeff Matthews.)
Insurance Company Watch List

Insurance company third-quarter results are starting to come out. One company that had been rumored to be on shaky ground, The Hartford, announced a $2.5bn capital investment by Allianz SE, the reduction of its dividend and pre-announced a third-quarter loss. Prudential also pre-announced third-quarter losses, as did a number of other life insurers.

MetLife, in a bit of a departure from the others, pre-announced third-quarter results in the Tehran Times. The Tehran Times also reported that “the insurer . . . plans to offer 75 million common shares to supplement the company's capital position. “ We’ll let you know how that goes; however, the Tehran stock market is doing quite well this year. http://www.tehrantimes.com/index_View.asp?code=179624

MetLife and The Hartford were put on negative watch by Standard & Poor’s earlier this month. The CDSs of both companies “were trading upfront, a sign of distress and heightened worry of a potential default.” By way of explanation, Chairman, President and CEO Mr. C. Robert Henrikson said, “MetLife continues to be a strong, stable leader in the financial services industry during a challenging environment.”

In agreement with Mr. Henrikson about the challenging part, Standard & Poor's said it is revising its outlook on the US life insurance sector to "negative" from "stable." It expects higher-than-usual credit losses and lower fee-based revenues as a result of the current turmoil in financial markets.

Now’s the time to amend living wills and revoke those do-not-resuscitate clauses if you, or an insured loved one, anticipate death anytime soon. And by all means, don’t jump, at least not until this matter is resolved.

mg

Just the Facts, no Tinfoil Hats

Some of my best friends wear tinfoil hats. These days, though, no sooner has a good conspiracy theory made the rounds, but it’s proven to be fact. This past weekend there were outrageous rumors that Argentina would confiscate citizens’ pension money. By Wednesday afternoon it was a done deal. There’s little point in providing a link; it’s old news now.

However, and borrowing heavily from a comment on Global Economic Trend Analysis, let this be a warning to us all. The Argentine state is taking control of its citizens’ privately-managed pension funds in a drastic move to raise cash. This could be a harbinger of what will happen across the world as governments discover that tax revenues are insufficient and bond markets unwilling to cover their obligations and deficit spending.

Then there was the one about war-hardened troops coming home from Iraq being stationed in cities across America. To fight terrorism, of course. Isn’t it illegal to use the armed forces for domestic law enforcement you ask? Sort of. Excluding Katrina, it happened before. That’s what the Civil War was about and, in particular, the aftermath. Regardless, they’re home and at their new battle stations throughout the country. Here’s a link to a link with the original story from Army Times plus insightful commentary: http://tinyurl.com/6dtgmn Having combat-ready troops on domestic soil will come in handy at some point, I’m sure.

So, howz about the Lehman CDS payout on Tuesday. Seamless. Nothing untoward picked up by the mainstream news or the blogosphere, nothing on Bank Implode-O-Meter and nothing on Hedge Fund Implode-o-Meter. Bit of a worldwide stock market crash, but probably unrelated. Unlimited lending from the Fed covered the banks, but what about the hedge funds? Well, hedge funds have a prime broker and the largest prime brokers are now subsidiaries of the largest banks and, to complete the loop, the banks have unlimited borrowing power. This story may not be over. For a few erudite observations, scroll down on Jim Willie’s new site: http://globaltinfoilanalysis.blogspot.com/

The Dow is back to bungee jumping, closing down almost 6% Wednesday and taking world stock markets with it on Thursday. Bloomberg reports that “Asian stocks slumped, driving the region's benchmark index to the lowest level in four years, as Japanese exports missed estimates, commodities prices tumbled and South Korea's worst financial crisis in a decade deepened.” Japan was down 2.46%, the Hang Seng 3.55% and Singapore 4.14%.

One of these days the markets are going to go down and stay down. That day could even be today.
mg

Could it Happen Here?

Despite hard times, what possibly could happen here in the land of the free and home of the brave? Hasn’t the US always stood for and protected the civil rights of the individual. No, it hasn’t .

In fact, the United States has a long tradition of violating civil rights and even the constitution itself. Going back to the first depression, which our current condition is likened to, FDR, at the beginning of his first of four terms, declared a national emergency and closed the banks. Spooked by the economy, people had been turning in their gold certificates for physical gold. With some exceptions, all gold was confiscated and all gold certificates had to be turned in for paper currency backed by trust in the US. When the banks reopened, all safe deposit boxes were sealed. Boxes could be opened only in the presence of an IRS agent. **oh, I didn’t know that**
Ok, but that was a long time ago you say.

In April 1971, in response to demands for gold from foreign powers, Nixon, unilaterally, without consulting foreign governments, broke the Bretton Woods agreement. He took the US off the gold standard and replaced “redeemable in gold” with the “full faith and credit of the USA.” **clears throat**

From Reuters on October 7: “The Group of Seven is no longer effective and should be replaced by a steering group that includes new emerging economic powers like China, India and Brazil, World Bank President Robert Zoellick said.” Further evidence of the US’s decline in international influence and prestige, the Treasury has bowed to pressure and will allow the IMF to examine its accounts. **gulps**

Just yesterday, October 21 on the Fed’s website: “The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will . . . provide liquidity to U.S. money-market investors. The MMIFF complements the previously-announced Commercial Paper Funding Facility . . . as well as the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions. ” On the surface, this sounds great; no more breaking the buck and suspending withdrawals from money-market funds. Finally, a bailout for average folks. **sigh of relief**
However, the motive was not to protect citizens. More likely it was to protect China, which has about $5bn stuck in US money-market accounts, other governmental agencies and institutional investors.

And then there’s Argentina, which, at its peak, was among the wealthiest countries in the world. Bloomberg reported yesterday that “Argentine bond yields soared above 24% and stocks sank the most in a decade on speculation the government will seize private pension funds and use the assets to stave off the second default this decade.” Among the reasons for merging US commercial banks and investment banks is to collect deposits, which can now be lent out with no reserve requirements.** starts sweating**

How about the privatizing of Fannie Mae and Freddie Mac, effectively nationalizing the US mortgage market, and the propping up of and bailing out some of the largest banks, and subsidizing the largest US insurance company? And we’ve just gotten started; there is so much more to come. States and municipalities have barely begun with the multi-billion dollar bailout of California. The industrials are next and have started with bailout money for General Motors and Ford. **mops brow**

At what point do we acknowledge that the US is no longer a democracy with free markets, but has embraced socialism? Could it happen here? It has happened here.

mg

The Banking Crisis is Over (?) Long Live the Economic Crisis

If you believe in the United States of America then you will believe in: JPMorgan Chase (which includes Bear Stearns and Washington Mutual); Bank of America (which includes Merrill Lynch); Wells Fargo (which includes Wachovia); Citigroup; Bank of New York Mellon; and the two brand-new banks, Goldman Sachs and Morgan Stanley. Each will be receiving multi-billion-dollar injections of cash from the Treasury. And, to help retain deposits, there’s the FDIC’s new deposit guarantee limit, which was raised to $250,000 per depositor from $100,000, at these and other fine banking institutions.

An early and harsh critic in this crisis and of just about everything else to do with the US, Ambrose Evans-Pritchard of the UK Telegraph said yesterday, “If the history of financial crises is any guide, the violent credit shock of 2007-2008 has largely run its course. The sovereign states of the US, Britain, France, Germany, Italy, Spain, and Holland have broad enough shoulders to carry their load of fresh liabilities – even if Iceland does not.”

So, PM Berlusconi and other rumor mongers, it looks like there won’t be a worldwide bank moratorium. And there’s no need to continue the run on your local branch, as long as it’s one of the above-mentioned nationalized survivors. Personally, I’m skeptical and I’m not keeping more than transaction-necessary amounts in my bank.

But then there’s this from Reuters: “The US government's broadly expanded guarantee program (via the FDIC) is expected to cover about $1.9 trillion in US banks' new debt and additional deposits . . . Bair called the temporary liquidity guarantee program a "profound and unprecedented action" to boost confidence in credit markets. The guarantees cover a pool of about $1.4 trillion in senior unsecured debt and about $400 billion to $500 billion in transaction deposit accounts, which businesses typically use to meet payroll and pay vendors.” Sounds good, but it was just in August that Bair said the FDIC: “might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.” At that time there were only about 100 banks on the problem list and there weren’t enough funds to cover the then $100,000 guarantees.

Is the world now safe for derivatives . . . for mortgage debt . . . auto loans . . . credit-card debt . . . your checking account? Probably your checking account, at least temporarily.
British economist John Maynard Keynes once said, "When the facts change, I change my mind." I think it’s too soon to change your mind.

mg

Derivatives: The Great Unwind

The market was up strong yesterday. Other than the shares of bank stocks, you have to wonder why. The worldwide central bank bailout is not intended for the equity investor, or general public, or business, or you, or me. It’s intended for banks, ostensibly to spur lending, but more likely to keep them afloat through next week’s Great Derivatives Unwind connected with Lehman’s bankruptcy. This has got to be a big part of the motivation of the CBs to provide unlimited lending to banks.

Distracted by worldwide stock market crashes, attention shifted away from Lehman’s derivatives’ payout scheduled for October 21. Recovery value has been set at 8.625 cents per $1.00, which means that sellers of credit protection must pay 91.375 cents to the buyers (according to Creditex, www.creditfixings.com, the company that holds auctions).

More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. The list of participants in the auction includes Newport Beach, California-based PIMCO (Pacific Investment Management Co.), manager of the world's largest bond fund; Chicago-based hedge fund manager Citadel Investment Group LLC; and AIG, the New York-based insurer taken over by the government, according to the International Swaps and Derivatives Association in New York.

According to JPMorgan, the largest foreign bank holders of Lehman’s derivatives are Deutsche Bank, Barclays, Societe Generale, UBS, Credit Suisse and Credit Agricole. Overall, as of June 30, 2008, the top ten US banks in terms of derivatives exposure were: JPMorgan Chase, Bank of America, Citibank, Wachovia, HSBC USA, Wells Fargo, Bank of New York, State Street Bank, SunTrust Bank, and PNC Bank, according to the Comptroller of the Currency Administrator of National Banks' Quarterly Report on Bank Trading and Derivatives Activities for the second quarter of 2008. http://www.occ.treas.gov/ftp/release/2008-115a.pdf Lots of other good information too, if you like this sort of thing, as I do.

And this is just the beginning. Few losses are expected from the failed GSEs. Fannie Mae’s senior debt settled at 91.51 and subordinated debt at 99.9 cents on the dollar; Freddie Mac senior debt was 94.00 and subordinated debt was 98 cents on the dollar. Washington Mutual could be another story. Its Credit Event Auction will settle, meaning prices will be determined, on October 23. Just last week there were credit events at the largest three Iceland banks, all of which have large quantities of derivatives outstanding. These are all financial institutions; industrials haven't started yet.

Nonetheless, the market’s up. For technical types, Mish Shedlock has a good and almost-understandable-by-laymen explanation of where the market is in terms of Elliott Wave theory. He says, “In terms of price, given the magnitude of today's move on top of the huge move up from Friday's low, the rally may be 65% over already. In terms of time, the rally likely has several weeks to a couple of months to play out.” See S&P 500 Crash Count at www.globaleconomictrendanalysis.com

In my opinion, the markets are still very fragile. Charts or no charts, it wouldn’t take much to trigger another cliff dive. We’ll see what happens next.

mg

A Look at this Morning's News

Not all that much seems to have come from the G7+ meeting this past weekend. We somehow expected more than: “The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

In its statement the Fed said: “In order to provide broad access to liquidity and funding to financial institutions, the Bank of England, the European Central Bank, the Federal Reserve, the Bank of Japan, and the Swiss National Bank are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.”

And just in the nick of time, we observe, options expirations aren’t far off.

Sunday night Bloomberg reported that the “Royal Bank of Scotland, HBOS Set to be Taken Over by Government. U.K. Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said.The government will also name representatives to the boards of RBS, Britain's fourth-biggest bank, and HBOS, its largest mortgage lender, and will work closely with the management on issues including executive pay, the people said. They spoke on condition of anonymity because the information is confidential.

This comes on the heels of Saturday’s announcement, “Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

In addition, “Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said on Oct. 5.”

We can’t help but notice that so far, not one of these increased-debt-related schemes has had any positive effect on the markets or the worldwide economy; just the opposite, in fact. Since the beginning of the year, the Federal Reserve has added more than $2.7 trillion, yes trillion, to its balance sheet, some of it in the form of guarantees and some of it against swaps of worthless mortgage-related securities.

The engine that drives the US economy and, therefore, the world economy, is the US consumer. The US consumer is tapped out due to maxed out credit cards, maxed out or withdrawn HELOCs reflecting underwater mortgages, no savings and, the last nail in the coffin, increasing unemployment.

The economy is in serious decline and there are few credit-worthy borrowers left. More debt couldn’t possibly remedy this situation.

mg

Wachovia, Citi and the FDIC or Wachovia, Wells Fargo and the Fed

Whilst all eyes were upon the Bailout negotiations, there was a little changeroo in the Wachovia rescue package.

According to Reuters on October 3, “Wells Fargo & Co agreed to buy Wachovia Corp. for more than $16 billion, besting a U.S government-backed Citigroup Inc. bid for some of its assets, in a deal that would catapult Wells Fargo to the top ranks of national consumer banks.

For each share of Wachovia, investors will receive 0.1991 Wells Fargo share, which is equal to $7 a share based on Wells Fargo's closing price on Thursday of $35.16.

A Wachovia spokeswoman said neither Citigroup nor the Federal Deposit Insurance Corp is involved in the transaction.

Wachovia closed at $3.91 on Thursday, meaning that Wells is paying a 79 percent premium.”
That’s an extraordinary premium even for a bank in good shape, and Wachovia wasn’t. The bank was seized last weekend the FDIC due to a “silent run.” Depositors, both institutional and retail, had pulled out money above the FDIC guaranteed amount of $100,000.

It was only on the 2nd that home-town Charlotte Observer reported, “With Wachovia already looking for a merger partner, the FDIC, in consultation with other regulators, required the bank to reach a sale to Citigroup on Monday morning.

The FDIC, for the first time, used legislative authority created in 1991 to help it deal with a “very large complex bank failure” on short notice. It requires approval from heavy hitters – two-thirds of FDIC board members, two-thirds of Federal Reserve board members, as well as the Treasury secretary, who must consult with the president (emphasis added).

In the resulting agreement, Citigroup agreed to buy Wachovia's banking operations and most of its assets, with assistance from the FDIC. The agency will pick up losses above $42 billion on a $312 billion loan book in exchange for $12 billion in Citi securities.

Money flowed out of Wachovia throughout the weekend, said Evans who heard anecdotes and received memos and BlackBerry messages from bank employees in the field. “What happened last week, and it literally happened that fast …You could go from being OK, hurt, weakened, there's no question the company was weakened… but you go from being weakened to in trouble in a matter of days,” he said. “I don't think people understand how quickly events unfolded.”
This is important to make note of. Anecdotal information on the reputable blogs and forums (see links in the sidebar for a few) are frequently reliable forward indicators of economic events. There isn’t a solvent bank out there and rumors quickly can become self-fulfilling. The takeover of Wachovia was inevitable, just like those to come will be.

The FDIC is broke; Sheila Bair said so herself. When out of funds, as what happened during the S&L bailout, the FDIC borrows from the Treasury. Presumably, that means it must be paid back through fees from member banks. The Fed has more autonomy than the FDIC, especially these days. Since the Fed began the special funding vehicles in 2007, all available pools have been increased.

So, where did Wells Fargo get so much money all of a sudden? It’s a stock deal, but there are significant expenses incurred for the merger and there will continue to be significant writedowns in mortgage portfolios by both banks.

Sept. 29 (Bloomberg)--The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
“European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed.”

However, Citigroup and the FDIC are no longer part of the takeover; but, read on.
“The Fed is also increasing the size of its three 84-day TAF sales to $75 billion apiece, from $25 billion. That means the Fed will make a total of $225 billion available in 84-day loans. The central bank will keep the sales of 28-day credit at $75 billion.

Special Sales: In addition, the Fed will hold two special TAF sales in November totaling $150 billion so banks can have funding available for one or two weeks over year end. The exact timing and terms will be determined later, the Fed said. The TAF program began in December, totaling $40 billion.”

Just sayin’, that’s all.
mg

The Bailout: Fed and Treasury Won't Give Up

The Emergency Economic Stabilization Act of 2008 failed in the House—225 to 228— on September 29. In an unprecedented and unconstitutional move, the bill was sent to the Senate, loaded up with pork and overwhelmingly passed—75 to 24— with no substantive change to the provisions that caused it to be rejected by the House.

So, we want to know, where’s the stimulation?

What the Bill won’t do:

1. Stimulate employment:
The plan has no direct affect on employment. Buying old bad debt from banks in exchange for brand-new, at-least-temporarily-good new debt does not decrease leverage, does not increase the money supply, and does not motivate banks to start lending. Really, who are they going to lend to in a rapidly deteriorating economy?

Further, it has little direct affect on employment other than on the Wall Streeters who will manage the pools of money.

It does not lighten the burden on Americans who are already in deep financial trouble; in fact, it increases the burden. The Treasury and Fed do not have an extra $700bn; they will have to borrow it. This bailout, the first tranche—not the whole thing, the first tranche— of which is $700bn, will be the largest tax increase in history.

2. Increase monies for mortgages:
Banks are not going to make mortgages on real estate that is rapidly decreasing in value, not should they. They are not going to give or refinance mortgages for people who do not have jobs. Anymore, that is. On the contrary, larger downpayments are being demanded and terms are tightening. There is even some anecdotal evidence of redlining, ironically in both low-priced areas and the highest-priced areas where real estate values are expected to erode fastest.

3. Increase, or even stabilize, sources of consumer debt:
Sources of consumer debt have been steadily drying up. HELOC lines are being frozen and cancelled, credit-card lines are being withdrawn, and other direct lines of credit, such as auto loans, are being cut off.

4. Free up other traditional sources of lending, like the bond market:
As an example, the front-page headline this morning in the LA Times: “The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500 million bond sale, Massachusetts had to pull the plug halfway into a $400 million offering, and Maine is considering canceling road projects that were to be funded with bonds.”

Municipalities have been coming to the bond market since the collapse of the ARS (Auction Rate Securities) market at the beginning of this year. Now that source of money has dried up.

The House is expected to vote on the revised plan today. As Drudge would say, developing . . .

mg