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March 15, 2008
SouthAmerica: The downward spiraling of the US financial system it has started spinning completely out of control â Itâs Panic time - and here is what the Fed is trying to do to slowdown the implosion process.
This is how a country descends into a Great Depression â it is a domino effect that happens one step at the time.
The Federal Reserve âMantraâ for the years 2007, 2008, and beyond is:
"Throwing good money after bad"
The Feds answer to how to slowdown the US financial markets implosion process and here are some articles that shows that the US financial system it is going over the edge of the abyss:
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âBehind Bear Stearns Rescue Plan, a Wall St. Domino Theoryâ
By JENNY ANDERSON and VIKAS BAJAJ
Published: March 15, 2008
The New York Times â Front page story
The Federal Reserveâs unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.
Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.
The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.
â¦âThe problem is the financing of the hedge fund industry is very concentrated and very brittle,â Mr. Sloan said. âIf they go under, you will have thousands of funds frozen out,â he said, adding that everyone might then have to wait for a court to name a receiver before business could resume.
Hedge funds rely on Wall Street for a range of services from the humdrum, like holding their securities, to the critical, like providing loans they use to increase their bets. As Wall Street has buckled under multibillion-dollar write-downs, the firms have cut financing to hedge funds and asked the funds to put up more assets to back their borrowing, forcing managers to sell en masse.
This has caused a series of hedge fund blowups, including Carlyle Capital, an affiliate of the powerful private equity firm Carlyle Group; Peloton Partners, a hedge fund founded by former Goldman Sachs traders; and Drake Capital, a blue-chip fund that has been struggling.
â¦But the bigger worry for hedge funds and others that do business with Bear Stearns is whether the firm will be able to honor its trades. Of particular concern are the insurance contracts known as credit default swaps in which one party agrees to guarantee interest and principal payments in case an issuer defaults on its bonds. Investors in such contracts with Bear Stearns are closely studying whether they can get out of them or have them transferred to a more stable firm.
Compounding the problem, some big investment banks this week stopped accepting trades that would expose them to Bear Stearns. Money market funds also reduced their holdings of short-term debt issued by Bear, according to industry officials.
âYou get to where people canât trade with each other,â said James L. Melcher, president of Balestra Capital, a hedge fund based in New York. âIf the Fed hadnât acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial systemâ¦.â
Source:
http://www.nytimes.com/2008/03/15/business/15risk.html?_r=1&hp&oref=slogin
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âRun on Big Wall St. Bank Spurs Rescue Backed by U.S.â
By LANDON THOMAS Jr.
Published: March 15, 2008
The New York Times â Front page story
Just three days ago, the head of Bear Stearns, the beleaguered investment bank, sought to assure Wall Street that his firm was safe.
But those assurances were blown away in what amounted to a bank run at Bear Stearns, prompting JPMorgan Chase and the Federal Reserve Bank of New York to step in on Friday with a financial rescue package intended to keep the firm afloat.
The move underscores the extreme stresses that the credit crisis has imposed on the financial system and raises the once-unthinkable prospect that major Wall Street firms might fail.
The developments may only postpone the eventual sale of all or part of Bear Stearns, which has had crippling losses on mortgage-linked investments. To keep the 85-year-old firm solvent, JPMorgan, backed by the New York Fed, extended a secured line of credit that gives Bear Stearns at least 28 days to shore up its finances or, more likely, to find a buyer.
â¦The size and terms of the credit line were not disclosed. JPMorgan will borrow the money from the Fed and lend it to Bear Stearns, and the Fed will ultimately bear the risk of the loan.
â¦The Fedâs intervention highlights the problems regulators face as they contemplate the prospect that investment banks, saddled with toxic securities tied to subprime mortgages, are losing the trust of their lenders and clients â the kiss of death on Wall Street, where confidence has always been the most precious asset of all.
Traditionally regulators have helped commercial banks in financial panics, but not investment banks, which do not hold customer deposits. But the 1999 repeal of the Glass-Steagall Act, the Depression-era law that separated investment banks and commercial banks, led to consolidation within the financial industry that has made such distinctions harder to make.
â¦In a conference call on Friday, Mr. Schwartz, who succeeded James E. Cayne as chief executive early this year, sounded frustrated as he described the run on Bear Stearns over the previous 24 hours, and raised the possibility that the firmâs days as an independent bank were numbered.
â¦The troubles at Bear Stearns have come quickly and savagely and hurt some of the putatively smartest money in finance. From Joseph Lewis, the Bermuda-based billionaire who bought $1 billion of Bear Stearns shares last summer, when the stock was trading at $100 and above, to William Miller, the vaunted value investor at Legg Mason, those who have wagered on a turnaround at Bear Stearns are many.
â¦The demise of the hedge funds began a slow but persistent loss of market confidence in the bank. Such an erosion can be devastating for any investment bank, especially one like Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it borrows more than 30 times the value of its $11 billion equity base.
âThe public has never fully understood how leveraged these institutions are,â said Samuel L. Hayes, a professor of investment banking at Harvard Business School. âBut the market makers understand this inherent risk. This is a run on the bank, just like Long-Term Capital Management, Kidder and Drexel Burnham.â
Source:
http://www.nytimes.com/2008/03/15/business/15bear.html?hp
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âBetting the Bankâ
By PAUL KRUGMAN
Published: March 14, 2008
The New York Times
â¦Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paperâs suggestions into effect. Unfortunately, however, the Bernanke Fedâs actions â even though theyâre unprecedented in their scope â probably wonât be enough to halt the economyâs downward spiral.
â¦These days, itâs rare to get through a week without hearing about another financial disaster. Some of this is unavoidable: thereâs nothing Mr. Bernanke can or should do to prevent people who bet on ever-rising house prices from losing money. But the Fed is trying to contain the damage from the collapse of the housing bubble, keeping it from causing a deep recession or wrecking financial markets that had nothing to do with housing.
So Mr. Bernanke and his colleagues have been doing the usual thing: printing up green paper and using it to buy bonds. Unfortunately, the policy isnât having much effect on the things that matter. Interest rates on government bonds are down â but financial chaos has made banks unwilling to take risks, and itâs getting harder, not easier, for businesses to borrow money.
â¦Officially, the Fed wonât be buying mortgage-backed securities outright: itâs only accepting them as collateral in return for loans. But itâs definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes.
Still, thatâs not what has me worried. Iâm more concerned that despite the extraordinary scale of Mr. Bernankeâs action â to my knowledge, no advanced-countryâs central bank has ever exposed itself to this much market risk â the Fed still wonât manage to get a grip on the economy. You see, $400 billion sounds like a lot, but itâs still small compared with the problem.
â¦What if this initiative fails? Iâm sure that Mr. Bernanke and his colleagues are frantically considering other actions that they can take, but thereâs only so much the Fed â whose resources are limited, and whose mandate doesnât extend to rescuing the whole financial system â can do when faced with what looks increasingly like one of historyâs great financial crises.
â¦I used to think that the major issues facing the next president would be how to get out of Iraq and what to do about health care. At this point, however, I suspect that the biggest problem for the next administration will be figuring out which parts of the financial system to bail out, how to pay the cleanup bills and how to explain what itâs doing to an angry public.
Source:
http://www.nytimes.com/2008/03/14/opinion/14krugman.html
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