(an interoffice email)

>
>
>
> Mkt did not like the Fed move today- IG9 went from 70 out to 78.75 after the
> news. CMBS cash (which had a roaring spread tightening in the morning of
> about 15bp) gave all but 6bp of it back. There was a rumor this AM that
> JPM is taking a look at Wamu, but nothing official materialized yet.

Thanks, watching to see if the tightening resumes after this afternoon’s ‘reduction of risk’ reaction to the fed report.

>
>
> General Credit News
>
> The US Federal Reserve cut the Fed Funds Rate by ¼ point and the discount
> rate by ¼ point. The market sold off due to discount rate cut being less
> than expected (people expecting a ¾ point cut). Also, the fact the Fed
> maintained concerns about inflation worried people.

Yes, the media had convinced everyone they didn’t and shouldn’t care about inflation.

>
>
>
> The CEO of the Dubai owned investment firm Istithmar PJSC said that US
> financial and real estate companies are at “attractive valuations” after
> their shares fell on the subprime mortgage crisis. The CEO said, “We feel
> there’s been an overreaction and the market has not yet separated the wheat
> from the chaff.”

Agreed!

>
>
> German investor confidence dropped more than economist forecast in December,
> reaching their lowest level in almost 15 years as rising credit costs dimmed
> the outlook for economic growth.

They must be watching CNBC, too!

>
>
>
> Homebuilder shares fell the most ever on speculation that the Fed’s interest
> rate cut may not be enough to increase demand for new homes or prevent a
> recession. S&P’s measure of 15 homebuilders dropped 9.7% today after the
> Fed cut rates by ¼ point.

Overreaction is my best guess.

>
>
>
> Citigroup Inc. (C): Board appointed Vikram Pandit CEO.
>
>
>
> Fannie Mae (FNM): CEO said the US mortgage and housing markets are unlikely
> to recover until at least 2010.

May not go through old highs until then, but should be bottoming somewhere around current levels of activity.


♥

4 Responses

  1. > The CEO of the Dubai owned investment firm Istithmar PJSC said that US
    > financial and real estate companies are at “attractive valuations” after
    > their shares fell on the subprime mortgage crisis. The CEO said, “We feel
    > there’s been an overreaction and the market has not yet separated the wheat
    > from the chaff.”

    Agreed!

    I have a slightly different take.

    Banks need liquidity.

    The Fed has liquidity.

    Dubai etc. has liquidity.

    Dubai etc. can provide liquidity to a banking entity and help determine the ‘chaff’ and ‘wheat’.

    Dubai could stand aside and allow the Fed to rework its system, which you are cheering forward. These changes in the system will reduce the ‘value’ of Dubai’s etc. stored liquidity.

    Point – ‘value’ in financial stocks and real estate is currently in the process of being allocated. Dubai’s etc. hand may have been called early as a preemption against changes at the Fed that will lessen its ability to help allocate those assets.

  2. At least partially due to a lack of understanding of the reserve system, the FOMC/NY Fed neglected to use their available tools to maintain the term structure of interest rates (as determined by FOMC vote) for its member banks, which added to volatility and the perception of risk during this process of lenders and investors altering previous credit assessments in what I call the great repricing of risk.

    Therefore the I see the Fed as partially responsible for some of the low equity prices in that it added to volatility and risk by it’s actions over the last several months, including the fiasco of the last two days.

    IMHO, this ‘new’ credit facility would have been implemented in August if the FOMC had a clear understanding of reserve accounting and monetary ops. It was the obvious thing to do, and would have reduced volatility and risk, though certainly not eliminated it.

    On to your points:

    Banks ‘need liquidity’ only to the extent they have debit balances in their Fed reserve accounts and would rather not see that ‘automatically’ become a discount rate loan at 50 bp over the funds rate and suffer the ‘stigma’ of borrowing at the window. Therefore they attempt to replace that ‘automatic/default loan’ at the Fed by bidding up for funds from other member banks who have credit balances at the Fed. The extent to which these banks don’t ‘want’ to lend to each is evidenced by the term structure of interest rates.

    Fed ‘has liquidity’ to the extent that operationally it can credit member bank accounts at will.

    Dubai ‘has liquidity’ in that it has or can obtain credit balances it can spend.

    The Fed does not buy bank equity directly from banks or from shareholders. The Fed only buys govt secs outright to offset operating factors or lends/borrows from banks and sets aside bank collateral as ‘security’ for those loans.

    So seems you are mixing metaphors?

  3. “IMHO, this ‘new’ credit facility would have been implemented in August if the FOMC had a clear understanding of reserve accounting and monetary ops. It was the obvious thing to do, and would have reduced volatility and risk, though certainly not eliminated it.”

    IMHO TAC’s could remove some of the system tilt toward big banks. All size banks would optimally compete at the same Fed rate from within the same ‘onerous’ regulatory framework. Large banks would no longer be able to ‘squeeze’ smaller players into bankruptcy. Citigroup along with it’s Dubai investment, loses some ‘value’.

    “So seems you are mixing metaphors?”

    Don’t think so. Both liquidity moves while of different form, changing of Fed structure and Dubai equity position purchases, are having an impact on financial asset values.

    First move: Dubai equity position purchase increased value of large banks.

    Question: Why purchase when they did? Why not wait even longer for better pricing?
    My Answer: Preempt fed move towards restructuring system. The Fed restructured anyway.

    Second move: Restructuring of Fed increases value of small banks as their cost of funds drop. Decreases value of large banks as small banks will no longer be ‘forced’ to borrow from large banks at penalty rates.

    Question: Why did the Fed restructure only now?
    My Answer: ????? Ben decided any change should make the system more ‘fair’ and finally gained enough political support? Threat of Citigroup, with Dubai’s help, getting even bigger than it already was?

  4. The Fed’s ‘job’ is to set rates for optimal output and growth. So when any market interbank rates are above the Fed’s target rate(s) and the Fed moves to bring these market rates back to its target rates, seems to me this constitutes ‘normal operations’ and it’s what the Fed is charged to do by Congress?

    And yes, supporting a ‘well functioning’ banking system supports the ‘real economy’ and thereby a lot of assets prices of all types of collateral.

    ???

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