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The Fed Makes a Surprise Move to Ease Credit Crisis


In a rare Sunday meeting, the Fed took action to prevent a worsening of the credit crisis. In the Fed's press release, it "announced two initiatives designed to bolster market liquidity and promote orderly market functioning." One of the actions was the cut in its lending rate to financial institutions from 3.50% to 3.25%. As this CNN article describes, the Fed also "created another lending facility for big investment banks to secure short-term loans."

The Fed didn't cut the target federal funds rate. That'll probably be cut by at least 75 basis points in the Fed's regularly scheduled meeting tomorrow. The Fed also approved of JP Morgan Chase's buyout of Bear Stearns. As this CNN article describes, "the all-stock deal values Bear Stearns at $236 million, or just $2 a share. The company's stock had closed at $30 on Friday."

As this Kiplinger article warns, this Bear Stearns collapse may be just the tip of the iceberg. I'm still keeping faith in the FDIC and NCUA. They have a long track record (see post), and I believe the government is going to do whatever it takes to ensure they meet their insurance obligations. Just make sure you stay below the insurance limits.

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Anonymous   |     |   Comment #1
Now lets see "Bear Sterns" executives getting millions in bonuses and pension extras.

For running the company into the ground.
Anonymous   |     |   Comment #2
Bear Stearns is just a tip of the iceberg. Feds are trying to divert the real problem they created to Banks and brokerage Banks.

Read this:
"Foreign investors veto Fed rescue

By Ambrose Evans-Pritchard, International Business Editor....

Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.

"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."

Even monetary policy à l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.

"It is like fighting a virus with antibiotics," he said.

We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.

But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?..."

Does anybody still believe that Ben knows what he is doing or thinking by lowering rates and trashing the Dollar?

Our dependency on foreign Capital will destroy our Banking system.
These pitiful interest rates they pay to depositors are sign of weak dollar and high hidden inflation.

Anonymous   |     |   Comment #3
Greenspan: Wall Street to Blame for Economy

Monday, March 17, 2008 10:43 a.m. EDT
Former Federal Reserve Chief Alan Greenspan squarely blamed Wall Street this week for irrational decision-making that has pushed the U.S. economy to the brink.

The economy, riding now on the edge of what is likely to be a serious contraction, can and will right itself -- once home prices revert to pre-bubble levels, Greenspan wrote in the Financial Times this week.
"But I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.”

Greenspan predicts that the immediate outcome will be changes to international bank regulations, known as Basel II. He notes that the free market is already at work, too, as investors demand more capital and collateral at the banks.

Yet he questions the wisdom of leaving the ultimate free market -- Wall Street itself -- in charge of managing risk so large that it can derail the world economy.

"The essential problem is that our models -- both risk models and econometric models -- as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality,” Greenspan wrote.

"One difficult problem is that much of the dubious financial-market behavior that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share,” Greenspan wrote.

"Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own,” he wrote.

In other words, Ben actions are not called for and are dangerous, since cutting interest dates is not the solution to the problem.
Anonymous   |     |   Comment #4
I agree with the previous reasoning.

Cutting rates creates problems and is not the solution to the problems.

Ben failed to address the real issues and is fully responsible for the mess.
Anonymous   |     |   Comment #5
Just think, we could have spent a few bucks buying them steroids and made baseball players out of them and they could have gotten their 200 or 300 million by signing a contract with the yankee's. And we have Krissie who will be well rewarded by magazines, talk shows, the book she is probally already writing, and etc for her few nights work with MR Clean. Mr Clean himself will make millions from writing a book or two and then get a quarter to half million for each speech he makes. The women who talk on tv just can't understand why the wife stood by MR Clean. Well, someone said don't bite the hand that feeds you. All of the above can be explained with one word. Greed. As long as failure and dishonesty is rewarded that is what we will get. Big executives always skim the cream off the top before the milk sours.
Anonymous   |     |   Comment #6
How is Ben fully responsible? He tried to do what was right by tightening up policy following Greenspan's punch-bowl approach. When that policy started to produce the expected soft-landing recession, now he is buckling in the pressure to inflate, and to force the public to assume privately-acquired risk. Bernanke can only be blamed now for buckling. And the central bank's intervention that set up this crisis in the first place can be blamed. Bernanke's approach to academic macroeconomic policy, however flawed the books are, cannot be blamed.
Anonymous   |     |   Comment #7
Greenspan started and Ben will finish us all.
The problem can not be solved by printing money or cutting interest rates or bailing out rotten potatoes.

Liquidity is not created by flooding
the Banks with cheap or almost free money. Liquidly is trust in Banks and borrower. Ben's idea is false and dangerous to all of us.
Bill   |     |   Comment #8
The funny thing that created this mess as all the easy money going around. The industry to blame are those of Mortgage Brokers. They had no interest on their customers or banks. they only cared about making the heightest yield-spread on their loans, putting people on loans/mortgages that they could not afford. The second are underwriters, approving all this free money to people. I remember one case where a person was working at stop & shop making 9.5 an hour buying a 350k house with no money down at 80% of that into a 7% and the 20% on 11% mortgage. you know that loan is going to default. My 5 year old could predict that, now that all these banks are going back to how it was... difficult credit because they only lend to those who are really really qualified which is the right thing to do.. plus they are lending money they have in their safe, not somebody else's money, so in turns you take better care of whats yours.....

The economy will fix it self when all these players that were in there to make a quick buck lose it all... they are the ones to blame....
Anonymous   |     |   Comment #9
Ben gave free $30 Billions to JP Morgan Chase, just to purchase Bear Stearn for $2 per share.

This is no bail out, this is criminal and stupid move. This will not stop the dollar from falling nor will create liquidity.

Ben creates more downfall to other Banks and institutions. Flooding money is inflationary and we will all pay it dearly in near future.
Anonymous   |     |   Comment #10
Not only the Feds, but Congress is to be blamed for trying to help borrowers who purchased $300K house with $30K income. There is no hope for such homeowners.

We borrowed money from abroad to finance housing bubble.

Ben got permission to go ahead to print money as much as he wants.

Foreign creditors are calling their margins and demand payments in full.

Dollar is falling and oil is going up together with all of the commodities.

Government is lying to us about the inflation.

Incompetency is the word I'm trying to interject in all of this.

GOD bless America.
Anonymous   |     |   Comment #11
I agree with all of the posts above.

Read also this:

" Shares of National City Corp. (NCC), which is reportedly seeking a buyer, lost more than 32% Monday on fresh concerns over the banking sector following the collapse of Bear Stearns Cos. (BSC).

Cleveland-based National City, which been hit by its exposure to subprime mortgages and cut its dividend, is exploring selling itself, The Wall Street Journal reported late last week.

"The key question, however, is that if this bank is up for sale, who would be the logical buyer," Punk, Ziegel & Co. analyst Richard Bove wrote in a March 14 research note.

Bove said the only natural buyers would by KeyCorp (KEY) and J.P. Morgan (JPM), which over the weekend agreed to purchase Bear Stearns at a fire-sale price. "

Ben is creating domino effect by cutting rates in the mid of crisis partially created by him.
Anonymous   |     |   Comment #12

You are serving the interests of the Big Banks well. Glad we hired you.

- Wall Streeter
Anonymous   |     |   Comment #13
Jim Rogers on the Bear Stearns bailout

'You know the reason they did it this way was because, if Bear Stearns had to declare bankruptcy, you'd realize that Bear Stearns paid out billions of dollars in bonuses in January - six weeks ago. If he let them go into bankruptcy, they all would have had to send back their bonuses. This is what they're doing, they're doing it so they don't have to give back their bonuses.'
Anonymous   |     |   Comment #14
Ben addiction to cutting rates will not stop until he runs out of ammunition or the rate is down to 0%.

"The Federal Reserve is expected to engineer an extremely rare cut of one percentage point in overnight interest rates on Tuesday, Fed watchers say."

What happens when the rate is that low?,,,,well, money has no value.
Anonymous   |     |   Comment #15
Hey Wall Streeter, do you know that you don't belong here!!!!!!

We are not going to engage you in stupid conversations....sho,sho....
Anonymous   |     |   Comment #16
Go Ben.

We've loaded up on stocks today.

Give us a big rate cut tomorrow.
Anonymous   |     |   Comment #17
Good article. The following quote is notable for showing just how clueless S&P is:

"It doesn't address the fundamental problems, which is that financial markets are just scared," said David Wyss, Standard & Poor's chief economist. "The Fed is trying, but they don't have a magic wand to wave and make everyone confident again."

Sorry, David, try again. The problem isn't that the market just happens to be scared. The real problem is that it is scared for a reason: insolvency and defaults are spreading, all as a direct result of the United States living above its means for three decades.

If the market were "just scared", then the correct course of action would be to smooth things over until the turmoil passes. That is what the Fed has been doing. Obviously, it isn't working. That is because the problems are real, deep-seated, and the Fed can't do a ****ed thing about them.
Anonymous   |     |   Comment #18
Does anyone have any forums to recommend for serious financial advice? I think it is clear that having money in "high yield" savings accounts over the next year is going to produce a negative real return over the next year(what? 3% return vs 6%+ inflation?). Where can one go?
Sofa King Frustrated
Sofa King Frustrated   |     |   Comment #19
Obviously, if one wants to stay in FDIC or NCUA insured accounts, one must seriously consider Rewards Checking Accounts.

There is still that 4.9% CD at Alliant CU, but that rate will fall after the Fed cuts the Fed Funds Rate another 3/4 to 1% this week.

The Rewards Accounts might also fall, but they know that if they fall too much, people will pull their money since the hassle of the debit transactions would not be worth it anymore.

Of course, if one wants to take the risk, and if one is ultra patient, one could invest in high quality stocks. It has been proven that high quality stocks will usually come back and increase in value over time.
Anonymous   |     |   Comment #20
Rewards ACCounts most likely will fall but probably will stay just high enough above regular accounts to encourage people to keep from closing them.

While regular savings and CD accounts are heading for rock bottom or negative returns after inflation, the one bright spot is that the principal is insured against losses.

Being retired and as great as the termoil is in the markets right now, that alone is a plus as far as I am concerned.
Anonymous   |     |   Comment #21
I agtee with Sofa King. Get a rewards checking for your ready cash and then look else where for some yield. I know most people who read and post here don't mess with anything that is not FDIC insured and to those people I say the smaller the risk the smaller the reward. To anyone willing to consider other things there are muni bonds[fed tax free} paying 5.25 to 5.50% that are AAA and insured. Preferred stocks paying 6% and more that qualify for 15% tax rate. Large cap stocks like Verizon 5%, Duke energy 5%, and Pfizer 6.20 %. These are examples and not recommendations. I was also much happier when cd's was paying 5.50% but the fact is they are not paying that now and trying to place blame and ****ing doesn't change that. Rates are low and going lower so you can accept them or do something different.
Bozo   |     |   Comment #22
To: Banking Guy and All
Re: What Next

Just my $.02. As most of you know, I am an irregular/regular poster here. I'm not going to toot my horn for having gone long (very long) back in August of 2006 on CDs yielding 5.75% plus for my ten-year ladder, although perhaps (to some) it might give me some credibility.

I was a contrarian then, I am a contrarian now. Now is the time to use all the spare cash you have, and I mean all of it, and pile into the most hated of all equities around: financial stocks.

Trust me, they are WAAAAY oversold, all this is hyperbole, and all will be fine in five years or so. Go find a good, low-cost financial sector ETF (Fidelity or Vanguard, it doesn't matter) and plunk down your money. Then go to sleep.

Assuming you are well diversified, even if you have a ton in FDIC/NCUA insured stuff (as do I), you should always keep a tad in your ammo locker for opportunities like this. Folks are getting creamed with margin calls, and their brokers are selling their portfolios for pennies on the dollar to meet those calls. Be a buyer in these situations. Use your liquidity to profit from the misery of others.

It may take awhile, and you won't catch the bottom, but you'll be close, and you'll be a happy camper in ten years or so. Trust me, been there, done that.


Anonymous   |     |   Comment #23
"Trust me"

Many a financial planner thrived on those two words.
Now there are a lot of poor people with their life savings at stake wish they had never followed their advice.
Yes, the stock market may eventually climb to new highs in the future. But how long will that take. People approaching or now in retirement do not have time on their side.

I have friends who have retired and several of them have been told by their financial planners to go out and find a job. And to think they are paying their planners for that advice. Unbelievable, but real!
Anonymous   |     |   Comment #24
Bozo, your thinking is wall street herd mentality. Since wall street can not attract foreign capital, they are turning to mom and pop, by telling that, this is almost the bottom and you will become rich at no time.

Wall street is master manipulator and lier. Once you give your money, it could become endless game of cat and mouse. You wait and wait and wait and by time you are ready to sell, they will create another crisis and by the time you make the selling, you are at the bottom again.

Good luck with your way of thinking.
Anonymous   |     |   Comment #25
Bozo, get real.

I worked as broker dealer sometimes back, and can tell you some of the lies we were told to say to our clients were unbelievable.

We used to call our clients to tell them that so and so stock is about to go through the roof and people would borrow against their properties just not to miss the opportunity.

Few months later we would call them again with another hot tip. We would sell previous holdings to buy just about same holding in other company an so on and on again.

I used to make commission on every buy or sell and that was the real money maker for me. Our clients were lucky to break even at the end of few years.

So, your thinking is flawed and unjustifiable to claim the stock market is bottoming and to jump in.

Investment Banks are connected to all brokerage companies and monitor on daily bases the money inflows and in what sector. Few day later,
they bet short and start selling their millions of shares to that sector. The stocks are going down and you are scratching your head thinking what to do. Your broker is saying stay put, you are pulling your hair and just before the bottom hits you get order to sell.

Investment banks and brokerages made tons of money and you will be forced to invest again with the idea that this time you will be wiser. Again, your mind will be manipulated by wall street gossip of what you should do next and the wishes cycle repeats again until you had enough and pull out with your tail between your legs.

Computer trading can knock a stock in half in just a few seconds. By the time you hear the news to sell, millions of stocks already were sold. You stand no chance playing the stocks to your likings. You are just a small fish amongst the hundreds of hungry sharks in the same pull of money.
Anonymous   |     |   Comment #26
>> Investment banks and brokerages made tons of money

yeah right.

yesterday one of the top 5 went belly up.
Anonymous   |     |   Comment #27
Go Ben !!!!!

We loaded up stocks yesterday. We unloaded today at big profit.

Good job Ben. Keep it up.
Anonymous   |     |   Comment #28
Yo Saver/losers,

Our man Ben has kicked your sorry a*** again! What the f*** are you going to do about it?
Bozo   |     |   Comment #29
To: All who bashed me

Had you folks bought VFH at the close yesterday (that's the Vanguard Financial ETF), you could have sold it today for a 6.25% gain in one day. Beat that with a CD.

The collective pessimism and doom and gloom (even evinced on this board) generally signal to me it's time to load up.

YMMV, but today, the proof of the pudding and all that.


Anonymous   |     |   Comment #30

As others have said you rock!

Today S&P 500 set a new record. It gained the most by points or percentage in last 5 years!

It was obvious to back up truck & load up yesterday & sell at BIG profit today.

Thanks Ben.

- Wall Streeter