Sunday, September 14, 2008

Countdown to Crash?


The Maestro, Alan Greenspan, was on ABC's This Week discussing the current financial crisis:

ABC News' George Stephanopoulos Reports: Former Federal Reserve Chair Alan Greenspan said this morning that this is "by far" the worst economic crisis he has ever seen.

"There's no question that this is in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go," he said in an exclusive "This Week with George Stephanopoulos" interview.

Greenspan also noted, "let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event."

Looking ahead, Greenspan changed a previous prediction on whether the economy is headed towards a recession.

When asked if the chances of escaping a recession were greater than 50 percent, Greenspan responded "no, I think it is less than 50 percent."

But in a "This Week" interview last December, Greenspan predicted "that the probabilities of a recession have moved up close to 50 percent, whether it's above or below is really extraordinarily difficult to tell. I think it's correct.

On the fate of investment bank Lehman Brothers, Greenspan said he did not know enough of the details to comment on whether the government should step in and help. However, when asked if we will see the failure of more financial institutions, Greenspan affirmed "I suspect we will."

"But in and of itself that does not need to be a problem," he explained. "It depends on how it is handled and how the liquidations take place. And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."

So how is it being handled? In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself to Bank of America for roughly $50 billion to avert a deepening financial crisis, while Lehman Brothers hurtled toward liquidation after Barclays walked away from a deal to save it.

And now what? What can we expect after the latest news? I quote the following:

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street.

Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies may still falter, like the American International Group, the large insurer, and Washington Mutual, the nation’s largest savings and loan. Both companies’ stocks fell precipitously last week.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about the difficulties of major financial institutions to recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

...

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America.

At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions.

But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

So should we put on our crash helmets?

Not just yet. This just in: a consortium of global banks just initiated a series of actions to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.

Specifically, the banks are working together to do the following:

  • First, to assist in maximizing market liquidity through their mutual commitment to their ongoing trading relationships, dealer credit terms and capital committed to markets.
  • -- Second, to establish a collateralized borrowing facility, which ten banks (Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS) have committed to fund for $7 billion each ($70 billion in total). The facility will be available to these participating institutions for liquidity up to a maximum of one third of the facility for any one bank. It is anticipated that the size of the facility may increase as other banks are permitted to join the facility.
  • -- Third, to help facilitate an orderly resolution of OTC derivatives exposures between Lehman Brothers and its counterparties. This effort included opening the OTC derivatives market for trading this Sunday afternoon.
These cooperative efforts will be enhanced by the Federal Reserve Board's decision to accept expanded classes of collateral under the Primary Dealers Credit Facility, including equities. All participating banks intend to utilize this facility beginning this week.

These actions reflect the extraordinary market environment. The banks are committed to continuing to work closely with one another as well as the U.S. Treasury Department, the Federal Reserve, the Securities and Exchange Commission, governments and regulators around the world, and other market participants, to ensure the industry is doing everything it can to provide additional liquidity and assurance to our capital markets and banking system.

The unprecedented measures to save the global financial system from systemic failure are troubling to say the least. I hope that sanity will prevail but I fear that animal spirits being what they are means that volatility reigns as we work through this critical stage.

Keep your crash helmets close by.

No comments:

Post a Comment