So the Phillies just won the World Series 20 minutes ago. In his acceptance speech, the owner did the stand-up thing by first acknowledging the Rays and their great effort. For all you baseball fans out there: has it sunk in that the Rays made it to the World Series this year? The Tampa Bay Rays. Together A-Rod and Derek Jeter make $50 million per year…$6 million more than the entire Rays team…
Banks AREN’T lending the money being gifted by Treasury! They’re using it to stabilize their balance sheets. As the WSJ is reporting this morning, most banks are hanging onto the cash being injected by Paulson, as opposed to using it for fresh loans, much to the chagrin of Democrats Chuck Schumer and Barney Frank (and the Republican administration itself as you’ll see below):
Stock market futures have triggered circuit breakers this morning, down the maximum they are allowed before the open. The SPX suggests the S&P will open down 9%. Everything is getting hammered in pre-market trading. Japan’s Nikkei was off 10% overnight to 7649. It had been over 18,000 just over a year ago. Britain announced a lower than expected GDP number, off 0.5% in the third quarter.
Where did the Lehman payouts go?
Over the weekend, the Depository Trust & Clearing Corporation (DTCC) issued a release stating that the net credit default swap (CDS) payout on Lehman bonds, to be paid on October 21. I’ve been talking to a few people about this over the last few days and this is the consensus. Sorry for only producing notes here…
It’s well-known that bond investors flew to quality last month, buying up short-dated Treasuries at fantastic rates (chart courtesy of Curious Cat). In a world where anyone could go bankrupt as the financial system melts down, who cares about yield? Investors are more concerned with principal protection. They trust Uncle Sam to pay back debts, even he has to run the printing press, so Treasuries are perceived as “riskless.” Over the long-term inflation is a threat, but no one cares about inflation next year when they think their bank could implode next week. Apologies I don’t have a more updated chart, but know that yields on the 3-month are still very low at 0.20%.
Brad Setser recently commented: “All major financial institutions in the G-10 ultimately now have access — through their national central bank — to the Fed.” To avoid another bankruptcy the size of Lehman, the Fed has basically guaranteed, well, the worldwide banking system. The problem is that an “unlimited guarantee requires unlimited access to financing.” No one, not even the Fed, has unlimited access to financing. The Fed only has unlimited access to a printing press. If the dollar loses all its value due to hyperinflation, it won’t be worth much to anyone as insurance against loss.
My old employer, The Providence Journal, has been kind enough to publish another one of my Op-Eds. This one lays out why I think the bailout bill, or TARP, is needed. It’s a little behind the curve, but that is because news travels faster than the ProJo’s publication schedule.