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by Mr. Chuckles, Unknown News
August 22, 2007
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| | Note: Information and opinions here are not guaranteed. This is infotainment only... Get a mindwipe after reading this, and then pass a big magnet by your computer just to be safe ... |
I believe that the Federal Reserve's half point
discount rate cut last Friday was an attempt to
prevent fatal damage to the money market
system.
At least a couple of trillion
dollars are in play in U.S. money markets, which are
considered "money at zero maturity" by
depositors, but the amount of actual cash held
in the funds may be far less -- 1% or so. These
funds hold "commercial paper", very short term
loans to corporations as well as other things,
including asset backed paper for things like
auto loans and mortgages in some cases.
Should American investors decide to make a
"bank run" on the money markets, there would be hell to pay. It would be chaotic because, among
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other things, pending trade/transactions would
"break" if the funds are not available on
settlement date.
On Monday (8/20), three month T-bill interest rates
dropped to 3-ish%, and one month rates dropped
to 1.3ish%, which indicates that people are
hurriedly evacuating riskier assets such as
stocks, bonds and money markets. The first
evacuees are guaranteed seats in the lifeboats
because the liquid assets get sold first,
leaving any crapola (solids) for the people
who didn't get the memo.
If my suppositions are correct, that there
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is a
run on money market funds ongoing, then the
brokerages, banks and mutual fund companies
will be forced to support the money market
funds with their own money, and possibly with
the Federal Reserve's discount window money
(trading in their commercial paper as
collateral). But if they're borrowing at 5.75%
to support their money market fund families,
then that situation cannot continue for long.
At the least they would need to reduce interest
payouts significantly, which would motivate
people to withdraw their funds even faster. And
in the worst case scenario of "breaking the
buck," returning less than $1 for each $1 in a
money market fund would create a catastrophic
stampede for the exits, and be totally self
destructive to the companies involved and the
markets.
So... All of this money market/commercial paper
horror must be solved immediately -- within a
month, maximum, and preferably this week. If
the short-term corporate paper markets remain
illiquid then the U.S. faces its own Shock And
Awe -- destruction of unimaginable scale as the
System implodes, as people
start demanding all of their money back --
which is impossible because it does not exist
(remember It's A Wonderful Life?).
I have no doubt that the Fed will cut interest
rates on September 18, and probably by at least
1/2 percentage point. They may move much sooner
than that, perhaps even this week.
To make my point more convincing without naming
names, one company issued a denial press
release on 8/16 (last Thursday) stating
that they have no asset-backed paper exposure.
Then on Monday the 20th, they issued a reiterated
denial press release. Why would they issue
either denial? To dissuade people from freaking
out and demanding their money back (which as
previously mentioned, does not exist, as it has
been loaned out.)
Obviously, take what I say with a grain of salt
and follow your own course according to your
situation. There are a few ways to handle this,
and things that can be done.
The bottom line, though, is that if the sanctity and
integrity of money markets and commercial
paper is in doubt then why are people buying
any stocks now (the rights of bondholders are
senior to those of shareholders...). Therefore
the Fed must be propping up the system. It
will soon be required to lower interest rates
by enough that existing paper is again
attractive, and so that in coming days/months,
variable rate loans don't reset a whole lot
higher. This will be a massive bailout of the
rich, perhaps the biggest ever! A trillion
dollars, minimum, before they're done.
For the interested or concerned, here is some reading material:
A terrifying chart of 3-month T-bill discount rates
No bids for corporate bonds
Investors' risk aversion is in full swing
"Money market" news search
Subprime infects $300 billion of money market funds, hikes risk
Treasury bill yields fall most since 1987 on money fund demand| |
Excerpt: Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S., as funds shunned assets that may be linked to a weakening mortgage market.
"The market is totally, absolutely, completely in fear mode," said John Jansen, who sells Treasuries at CastleOak Securities LP in New York. "People are afraid that lots and lots of mortgage paper and mortgage paper derivatives of all sorts is completely opaque and they can't price it. ... |
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All of this money market/commercial paper
horror must be solved immediately -- within a
month, maximum, and preferably this week.
If
the short-term corporate paper markets remain
illiquid then the U.S. faces its own Shock And
Awe -- destruction of unimaginable scale as the
System implodes, as people
start demanding all of their money back --
which is impossible because it does not exist
(remember It's A Wonderful Life?).
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