Monday, November 24, 2008

Bailout Sundays


Our Nation's quick-draw team has ... had another bailout weekend. Citigroup is the patient on the table, five-days after they started a free-fall.

The deal is the deal, improvised or not. I don't think you need to take-up 90% of the residual to make a good re-insurance market, but other (more informed) opinions could be had on that. It's a noteworthy point, especially because one may want to repeat this guarantee immediately at the next target (and there will be one, right?). I also think that the government should have left some of the tail probability on the table, taking just a "slice" not the whole enchilada. Last, a back-of-the-envelop, 10% haircut seems ... so yesterday, compared to the valuation technologies available, presently. Also, I guess Wilbur Ross, a lighthouse of the free-marketeers, wasn't available...

The markets will likely cheer the result, in a modest way, but will wonder if we still have moved from weekend-solutions to a comprehensive solution that was sought by "enacting TARP".


Meanwhile, the worst number from last week was the yield on long-term Treasuries.

That was no panic buying (I don't think). The market has clearly started to lose confidence in the direction of the real U.S. economy. Chief culprits are the Bush-Paulson abdicating their leadership and a lack of a plan to address the bad-asset problem, right at the source - foreclosures, real-estate price declines, and, now, weak economic activity.


The diagrams of a "bad-asset cycle" suggest, conventionally, that economic stimulus will "break the cycle", even if I thought that addressing the bad-asset problem (the value of home collateral) directly would have been a good first "stimulus" step.

So far, our reactive policy seems unable to get ahead of the curve. We haven't stopped any market from "breaking", that I can think of. To paraphrase Galbraith, "the key feature of the panic was that it kept getting under-estimated [until the system was so weak that antibiotics wouldn't work]."

Snarking aside, we can (and must) track the shoes in the cycle:

  • Subprime has gone first, along with the bond-insurance markets.
  • Weak corporate credit may have gone second (not just the non-financials, but the financial CP market, including non-bank financials).
  • Regular corporate credit has worsened, arguably, but not yet broken (not sure where the super-senior synthetic CDO risk on corporates is trading, now).
  • Last week, commerical-MBS broke.
  • Last month, the ABS market may have had a seizure.
  • The commodity markets have largely imploded
  • We've had the first round of a currency crisis in the developed economies that has spilled over to the emerging economies.

On deck:
  • The massive insurance market looks like it is ... dire.
  • The municipal bond market is holding on, so far, given the failure of the bond insurers and the interregnum uncertainty in the U.S.
  • The global sovereign market is okay, but cracking at the fringes. A second-round of currency crisis ... waits for a 'trigger'.
  • We are waiting to hear what is going to happen with alt-A "prime" and regular-way prime RMBS.
  • The agency market is under attack by the Treasury Secretary and his rightwing ideological travelers.

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