More on Madoff; Interest Rates and the Economy
Dec 18, 2008
Posted by Jody Eisenman | Filed under Uncategorized
I will not repeat all the stories on Madoff which readers can find all over TV, newspapers and the internet. However, a few items strike me as significant. First of all, Madoffs’ hedge fund did not utilize the services of a prime broker. A prime broker generally acts as sort of a central clearing agency for all of funds’ trades. In other words, most funds have accounts at several different brokerage forms. It is quite cumbersome to review several brokerage statements; the prime broker consolidates everything for you. In addition, the prime broker can extend credit (i.e. margin) if the fund wishes to utilize it. Most funds, especially those in the billions of dollar range, utilize prime brokers’ services, which are offered by many major firms such as Merrill Lynch, Goldman Sachs and Jeffries. The fact that Madoff did not use one should have raised some major red flags. It is also inconceivable to me that Madoff acted alone. It is known that Madoff kept at least 2 sets of books and records, and sent out regular monthly statements (which supposedly included actual, albeit fictitious, trades) to his clients. It is difficult for me to believe that all this was the work of one senior citizen. In my opinion, several people had to be involved in this scam. I hope the truth will come out soon.
The Fed basically cut their target rate to zero this week. The market jumped several hundred points on this news, and now seems to be slowly giving it back. For the month of December, we are basically flat, which is clearly a lot better than the last three months. In the face of this economic decline, the good news is that the Fed is basically firing every bullet they can at the problem. The bad news is that it doesn’t seem to be working. Even worse, it would seem that the Fed is virtually out of bullets. Last time I checked, zero is the bottom. However, as this has not stimulated lending, overall rates on mortgages and bonds have not declined appreciably. For example, 2 year treasuries yield roughly .68 pct. 2 year A-rated corporate bonds yield around 6.20, or roughly 9 times as much. In other words, if rates remained here, you could earn the same amount of interest on a single A-rated corporate bond in two years that would take you over 18 years to earn on a US treasury. Of course, the rub is that you hope the corporation won’t default. Simply put, investors are unwilling to accept risk. This has major implications for our entire economic system. If companies cannot raise capital, they will have a very difficult time growing. Even worse, may of these companies are going to have a hard time repaying their existing debt. Generally, companies (and municipalities) tend to roll their debt. In other words, they tend to pay off their existing bonds by issuing new ones. In this market environment, this is extremely difficult, if not impossible. I honestly don’t know what else the Fed can do in order to alleviate this crisis. Let’s hope there are some smart people in Washington who can come up with a solution.
December 18th, 2008 at 7:48 pm
They are firing every bullet in the wrong direction!!!!!!!I cant believe this country is so stupid. Or maybe they aren’t and are doing this on purpose. First ill start with the automotive industry… They have no money because no one is buying their cars. Current solution…. give them our money so they can make more cars for us not to buy!!!!! Common sense solution – give us our damn money back so we can spend it!!!!!!!!!!
Second the bad mortgages and people not being able to pay the off. Current solution…give the banks our money so they can make more loans that cant be repaid!!!! Common sense solution….give us our damn money so we can pay the bills!!!!!
The only way to fight a recession is to get people to SPEND!!! not borrow. Give me some of my money back so i can buy something simple as that.
I am surprised that these people are the people we voted to lead us.