All Eyes Turn to Europe
Oct 12, 2008
Posted by Jody Eisenman | Filed under crisis
In a bold new initiative, a 15 country consortium have now agreed to guarantee new bank debt through 2009. According to Bloomberg, “The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any “systemically” critical banks in distress.“
However, the very next quote is:
“I don’t even want to imagine what might happen” if the markets react negatively,
Klaus-Peter Mueller, head of the German banking association, said earlier today in Washington before the blueprint was unveiled. The market response may be something “we haven’t seen at any stage in our lifetimes.”
This is from today’s Financial Times:
“World leaders are scrambling to finalise rescue plans for their banking systems before stock markets open on Monday, amid fears that the global financial system is on the brink of collapse. Britain, meanwhile, was preparing to pump more than £37bn into four of the its largest banks in a broad-based recapitalization that could see the UK government end up with controlling stakes in Royal Bank of Scotland and HBOS – Oct 12 2008″
OK, so clearly the world governments are now doing something that would have been unthinkable previously. Essentially, they are going to take stakes in the major banks (perhaps controlling stakes) in order to provide much needed capital. Hopefully, this will allow (or possibly force?) the banks to begin lending again.
I believe this is a much needed step. However, there are major implications to this. As it stands now, the US has now guaranteed the following:
1. Fannie Mae and Freddie Mac
2. The commercial paper market
3. The money market funds
In addition, they are looking to take equity stakes in the major banks. So, effectively, the age of privatization has ended. Welcome to Big Brother, as the government will soon effectively control most of the lending mechanisms as well. I’m sure the Fed’s plan is to hope to shore up these markets such that they can gradually withdraw and allow these institutions to function in a manner similar to how they have functioned in the past.
There can be little doubt that many of the smaller banks and lending institutions will probably either be absorbed by larger ones, or simply go out of business. As mentioned Friday, Morgan Stanley is believed to be a critical state right now. Although they continue to claim that Mitsubishi is giving them nine billion dollars, I am skeptical, as the current market capitalization of all of Morgan right now is only slightly higher. It would not surprise me if they become the next casualty. I’m pretty sure they’re in talks Paulson right now.
Meanwhile, the VIX (a measure of market volatility) is over 70, an astronomical number. Even Jim Cramer thinks the Dow might drop to 5000.
I think this is a necessary step, but it probably needs to be combined with an unlimited FDIC guarantee on bank deposits as well. I do believe this will work, but as I have been saying, we are really running out of time. I think that if the markets don’t react positively this week, we could be looking at financial Armageddon.
