Archive for September, 2008

Senate Sets Bailout Vote

Kurt Brouwer September 30th, 2008

Update:  The Senate passed the Emergency Economic Stablization Act of 2008 by a 74 to 25 margin.  On to the House.  The House vote should happen tomorrow.

The U.S. Senate has set a vote on a sweetened financial recovery bill that appears likely to pass.  With the changes, there is a fair chance the House will pass it too.  This Bloomberg piece [emphasis added] has the details:

Senate Sets Bailout Vote, Sweetens Plan With Deposit Insurance (Bloomberg, October 1, 2020, James Rowley and Brian Faler)

The U.S. Senate set a vote for tonight on a $700 billion financial-rescue plan, tying it to an increase in bank-deposit-insurance limits and tax breaks to win support from Republicans.

The Senate agreed to vote on the legislation along with the measure temporarily raising the limit on federal deposit insurance to $250,000 from $100,000. That increase was proposed by Republicans critical of the plan authorizing Treasury Secretary Henry Paulson to buy troubled debt from lenders, which was rejected by the House on Monday.

Also linked to the legislation is a two-year extension of tax breaks that will save individuals and corporations about $149 billion over the next decade, another move popular among House Republicans. Two-thirds of House Republicans and 40 percent of Democrats defeated the bailout plan on a 228-205 vote. President George W. Bush and Senate leaders had vowed to revive the legislation.

The Senate is expected to pass the bill, with most Democrats and Republicans behind it. There’s also increased optimism the House will go along, as pressure mounts on lawmakers to help restore confidence in the banking system.

After a week-long torrent of calls and e-mails from angry voters opposing the rescue package, the tide turned after markets plunged on Sept. 29 in response to the House vote…

I have mixed emotions about the financial recovery plan.  Nonetheless, I expect it to pass and I hope it works very well.  If it works as advertised, then that would be good.

It is ironic that so many voters opposed the legislation initially because they viewed it as a bailout of Wall Street.  It was not a bailout in any sense I could see, but that is how it was perceived.  But, once the stock market tanked on Monday, voters changed their minds and now support for the plan is much stronger. The changes to the plan will also let those Democrats and Republicans who voted against it save face and vote for it on the second try.  Ah, don’t you love politics.

See Will The Guilty Pay — In Washington or Wall Street? and Financial Bailout Failure Roils Markets for more.

Are Banks Still Lending?

Kurt Brouwer September 30th, 2008

With all the inflammatory talk about banks not lending, these charts from the St. Louis Federal Reserve present a different picture.  I’m sure lending to certain sectors has dried up, but overall activity still seems robust.

Commercial and Industrial Lending

Source: St. Louis Federal Reserve

The chart above shows weekly commercial and industrial lending activity from large commercial banks and it would appear that lending activity is far higher than it was a year ago or even at the beginning of the year.  Activity peaked in the summer and now it is starting back up again.  This chart goes through September of this year.

But, what about the consumer?  Clearly, banks are not lending to consumers and consumers are not borrowing, right?  Maybe that’s not quite accurate either in spite of media reports:

Consumer Lending

Source: St. Louis Federal Reserve

As we can see, consumer loans from commercial banks went up at least through the most recent data the St. Louis Fed had, which was August.  The evidence is clear — at least through August, consumers were borrowing  and commercial banks were lending them money.

Finally, what about real estate loans?  We all know what the conventional wisdom is — that real estate lending has dried up.  This final chart covers real estate loans from commercial banks and these loans did peak in April of this year, but lately activity has picked up.  Even with the pullback, real estate lending is higher now than a year ago and higher than it was in the beginning of the year.

Real Estate Lending

Source:  St. Louis Federal Reserve

I realize that this information contradicts the conventional wisdom we are hearing from the media and our political leaders, but these are facts, not rhetoric.  It may well be that lending activity at banks is going to dry up, but there is no evidence from the St. Louis Fed that suggests such activity has already dried up.  In fact, the evidence is that activity in all three areas is higher than it was at the beginning of the year.

Dollar Rallies Against Euro — Flight to Quality

Kurt Brouwer September 30th, 2008

Source: St. Louis Federal Reserve

It was not long ago that pundits and currency prognosticators were predicting that the Euro would surpass the U.S. dollar as the world’s reserve currency.  Of course, years ago other such pundits predicted the same thing for the Japanese yen and that never happened.

How does the Euro look in terms of surpassing the dollar as the world’s reserve currency?  Not so good. During this credit crunch and financial crisis, it is revealing to see that the dollar is gaining value and the Euro is tumbling. The Euro’s high point was almost $1.60 to one Euro.  This chart from the St. Louis Federal Reserve actually understates the movement because today, it takes $1.40 dollars to buy one Euro.  That’s still far from the dollar’s strongest point which was in 2001 when it took 84 cents to buy one Euro, but the trend is moving towards the dollar as this piece from Bloomberg [emphasis added] illustrates:

Euro Falls Most Against Dollar Amid European Banking Failures (Bloomberg, September 30, 2020, Daniel Kruger and Ye Xie)

The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe.

…The euro fell 2.5 percent to $1.4081 at 3:51 p.m. in New York, from $1.4434 yesterday. The euro also slid to 149.74 yen from 150.38. It earlier reached 148.55, the weakest since Sept. 16. The yen weakened to 106.43 per dollar from 104.18, after earlier reaching 103.54, also the most since Sept. 16.

…”There is a mad scramble for U.S. dollar funding demand from a global U.S. dollar-based financial system,” said Claudio Piron, Singapore-based head of Asian currency research at JPMorgan Chase & Co, the second-biggest U.S. bank by market value…

I don’t want to make too much of this currency movement because it reflects lots of short-term uncertainty and volatility and when things ease up a bit, we may see a move back in the other direction.  Yet, it still must be noted that when things get tough, the world flocks to the U.S. dollar.

Why? Safety. Liquidity.  The rule of law.  Despite a Congress that acts like a bunch of spoiled children, investors want the dollar because they believe their money is safer here than in Europe or elsewhere.  Maybe Americans should take some comfort in knowing this.

Oil Plunges $10 Per Barrel

Kurt Brouwer September 29th, 2008

My wife and I were sitting quietly on the ledge talking about stock market activity tonight.  Just kidding about the ledge part, but we were talking about recent events and she did make a good point about two trends that have gone largely unnoticed.

She pointed out that the dollar was soaring and oil prices were tanking.  Had anyone told us that the dollar would be in a strong rally versus the Euro by October and that oil prices would be well under $100 per barrel, we would have cheered.  And, inflation is slowing rapidly too.  It’s all good, right?

Well, not exactly.  But, we can at least point to this good news on oil as a relief from the rest of the financial news:

Oil plunges $10 as U.S. bailout plan voted down (Associated Press/Yahoo, September 29, 2020, Stephenson Jacobs)

Oil prices tumbled more than $10 a barrel Monday, dropping back below $100 as a U.S. financial bailout failed to win legislative approval, raising fears of a prolonged economic downturn that could drastically erode global energy demand.

Light, sweet crude for November delivery sank $10.52, or 9.8 percent, to settle at $96.36 on the New York Mercantile Exchange, after earlier dropping as low as $95.04.

The dramatic sell-off capped a week of frenzied volatility in oil markets.

A week earlier, prices shot up over $16 to $120.92 a barrel in the biggest one-day dollar gain ever. But as disagreements over the government’s $700 billion bailout plan intensified over the last several days, oil market traders began moving out of their positions at a rapid clip; Monday’s decline was the second largest ever in dollar terms and the biggest percentage-wise since 2001. Crude has now fallen almost $25, or 20 percent, in the last seven days.

…”This is an acknowledgment that the global slowdown is here and energy demand is not going to be what it was,” said Phil Flynn, energy analyst at Alaron Trading Corp. in Chicago.

...Energy consumption overseas is also expected to drop, even in fast-growing developing countries such as India and China, where booming demand for cars and other goods helped drive the oil bubble earlier this year.

“With demand falling at the pace it is, nothing can support crude at levels above $100,” said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and “There’s no underlying demand from any pocket.”

Other commodities also traded sharply lower Monday as investors bet that a widening economic malaise will swallow demand for building materials, grains and other goods.

Highlighting weak U.S. appetite for energy, pump prices kept falling Monday. A gallon of regular slipped about a penny overnight to a new national average of $3.643, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices peaked at $4.114 on July 17…

Financial Bailout Failure Roils Markets

Kurt Brouwer September 29th, 2008

Update: The negative news on the financial bailout vote failing in the U.S. House of Representatives certainly did roil the markets and stocks plunged across the globe.  Here at home, the S&P 500 fell 8.79% and other indexes, both foreign and domestic fell sharply as well.

Though it may not seem very exciting on a day like this, there is one bit of positive news, which is that the U.S. dollar is having a strong rally versus the Euro and the British Pound.  This article from the U.K.’s TimesOnline [emphasis added] makes the point:

In its latest severe sell-off, the already sharply weaker pound plummeted by almost 5 cents against the dollar today compared with its level at the close of New York trading on Friday.

The fall of more than 2.5 per cent in sterling saw it tumble from $1.8445 to levels below $1.80, taking it to a 10-day low of $1.7962. The pound has now shed almost 11 per cent against the greenback from peaks above the watershed of $2 reached at this time last year.

…The euro also fell heavily against the dollar amid concern over the eurozone’s banking strife and the adequacy of arrangements for bank rescues in the 15-nation bloc. The euro lost as much as 1.8 per cent against the dollar, falling to levels of about $1.4340 from a US close of $1.4613 on Friday…

Financial Bailout Vote Fails

Stocks opened lower today as investors seemed to be quite negative about the terms of the proposed financial bailout being voted on in Congress today.  However, when it appeared that the bailout proposal was not going to get through the House of Representatives, the stock market tanked as this article from the Associated Press explained:

Fear swept across the financial markets Monday, sending the Dow Jones industrials down as much as 705 points, as the financial bailout package was defeated by the House.

As the vote was shown on TV, stocks plunged and and investors fled to the safety of the credit markets, worrying that the financial system would keep sinking under the weight of failed mortgage debt.

…The markets were highly volatile, with the Dow regaining ground to trade with a loss of about 360, then falling backing again, trading down 481.39, or 4.32 percent, at 10,661.74.

Broader stock indicators also fell. The Standard & Poor’s 500 index declined 63.13, or 5.20 percent, to 1,150.14, and the Nasdaq composite index fell 124.29, or 5.69 percent, to 2,059.05.

With Wall Street nervous that the plan may not pass, the yield on the 3-month Treasury bill fell to 0.68 percent from 0.87 percent on Friday. That showed that investors were prepared to get meager returns on an investment as long as it was secure…

The House did fail to pass the bailout in a bipartisan defeat for the controversial measure.  At this point, it would seem that Congress and the U.S. Treasury have to go back to the drawing board.  The problem, of course, is that Congress has very little credibility with the American people.  In fact, Congressional approval ratings were at an all-time low a few weeks ago.  This mess has not helped Congress’s approval ratings I’m sure.

Many of the problems we are facing have been caused by Congress and its weak oversight of Fannie Mae and Freddie Mac and other mandates to push subprime loans through the banking system.  Other government agencies — Federal Reserve, U.S. Treasury, SEC — also get poor marks.  And, Wall Street and its penchant for high leverage and speculation deserves plenty of blame as well.  Finally, many Americans helped exacerbate this problem by purchasing homes they could not afford and then walking away from the loans when they became inconvenient.  All in all, there is plenty of blame to go around.  But, now is not the time to focus on blame, but rather on solutions.

Asking government entities — the very ones that helped get us into this mess — to devise a creative solution to this crisis is a bit like doing the same thing over and over again, but expecting different results.  However, I am comforted by something Winston Churchill said during World War II, ‘America always does the right thing, after trying every other option.’  Unfortunately, we seem to be proving Mr. Churchill correct again in that we are trying lots of options without finding a solution.

I just hope we don’t take too long to run through all the options.  Even though most of us don’t like this bailout, some form of government assistance to the credit markets may be necessary at this time.  Once the crisis has passed, we can revisit it and make long-term, structural changes as needed.

Next »