Fed Opens Yahoo Lending Facility (YLF)
When the Microsoft-Yahoo news came out last night, I suggested that "the Fed ought to kick in the additional $8 billion or so to make this happen."
Someone on the the Yahoo message boards of YHOO itself took the idea a step further:
"In response to recent events Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create Yahoo Lending Facility (YLF) to avoid significant stock market distruption and to support Yahoo! Inc shares. Yahoo! Inc and its authorized agents will be able to borrow from the facility to support stock price.
This facility will be available for business on Monday, May 5. It will be in place for at least six months and may be extended as conditions warrant. The interest rate charged on the credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
In addition, Yahoo! Inc shareholders who are unable to sell their shares at or above Friday, May 2 closing price, will be able to swap Yahoo! shares for the US Treasuries at the set price of $29.70 per share."
Fed opens Yahoo Lending Facility 3-May-08 11:58 pm
>
Hat tip: John Borchers
Previously:
Ballmer, Yang Agree to See Other People http://bigpicture.typepad.com/comments/2008/05/ballmer-yang-ag.html
Sunday, May 04, 2008 | 07:06 AM | Permalink
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Sad but true.
The Fed has created a no-fail environment for big banks and their investors, shielding them from any real world consequences for thier bad decisions, so why not all of corporate America?
Posted by: DownSouth | May 4, 2008 8:36:40 AM
Its much too early for the Fed to step in. Wait for Yahoo to be essentially bankrupt. Then watch as Microsoft steps it to buy Yahoo for $2 a share with the Fed guaranteeing Yahoo's liabilities. The Midas fed. Turns crap into gold. Whatacountry!
Posted by: Bluzer | May 4, 2008 8:47:23 AM
Nobody's saying much about the overall market implications of the busted MSFT-YHOO deal. A failed employee buyout of United Airlines in Oct. 1989 provoked a one-day, 7 percent drop in the Dow. Surely nothing like that would happen again, right?
Oh well, if it does, the Yahoo Lending Facility may turn out to have been a trial balloon posted anonymously by Tim Geithner. Paint that tape, buddy! CONfidence is everything.
Posted by: Jim Haygood | May 4, 2008 8:52:32 AM
Yahoo short interest as of 4/15 was lowest in at least a year...36 Million shares...was as high as 79 Million last May. This gives an insight into the high level of optimism that was just squashed. Can Yahoo's management be this reckless to turn down such a premium?
Posted by: Steve Barry | May 4, 2008 9:07:34 AM
It is a win-win situation for the markets!
Google Wins!
MSFT wins -- no buyout means share bounces back -- means nasdaq will have a 2-3% up-day!
Yahoo doesn't matter. If fed steps in -- a 5% up-day!
YES!
Posted by: Nihilism | May 4, 2008 9:11:50 AM
I don't know the details of the machinations of the wrangling in the last few weeks between MSFT and YHOO execs over T&C's, but when was the last time any CEO walked away from this high-profile of a deal?
Posted by: bonghiteric | May 4, 2008 9:14:58 AM
Nihilism -- Bingo! LOL!
Cancellation of a $50 billion deal just means it'll come back next week as an $80 billion deal.
Get ready for our first 1,000-point up day. Would you sell me some S&P 1600 calls for a nickel?
Posted by: Jim Haygood | May 4, 2008 9:21:47 AM
are you guy serious? When this deal was announced, futures SURGED because of optimism that M&A deals were alive again and the market was returning to healthy days.
Now that the deal is dead, you expect another surge? Yhoo will be down 6-7 bucks and MSFT prob up 3-4 bucks. So, yea MSFT will add to futures, but overall, this should be sour for market futures.
Posted by: UrbanDigs | May 4, 2008 9:28:31 AM
The problem with this proposal is that YHOO does not have enough bad debt.
What should the Fed accept as collateral?
Posted by: wolfgang | May 4, 2008 9:51:38 AM
Urban -- no, not serious. Of course the busted deal should be a negative.
However, I think MSFT constitutes about 5.5% of the NDX index, while YHOO is more like 1.1%. So, it's hard to discern the net impact on the NDX, unless there's a general tech selloff.
Posted by: Jim Haygood | May 4, 2008 9:52:25 AM
The Lending Auction Facility, or "LAF".
Posted by: Toro | May 4, 2008 10:30:57 AM
This fiasco is very similar to the Oracle-BEA System deal. Larry Ellison walked away at first because Alfred Chuang was asking for more money just like Yang is now. Yahoo! displayed very little concern for its shareholders and I expect a revolt on Monday or at least some serious complains. Large shareholders like Bill Miller want this deal to happen. Can these guys force the issue?
What is comical about this is Jerry Yang's nonsense talk. He said now that the distractions are behind Yahoo! it was time to focus on creating shareholder value. So he is going to do that by partnering with Google? Wow! Talk about admitting that you are toast.
Posted by: maximo | May 4, 2008 11:37:17 AM
Nothing would suprise me at this point.... Our fed is a joke of manipulation and smoke and mirrors..... The Fed and our Government sicken me in a manor I never thought possible.......The manipulation and smoke and mirrors are unbelievable in nature..... The random Joe on the street has no idea how twisted our system really is.....I hope MAJOR changes (I don't care if the changes cause major pain to our markets and economy) are coming..... Otherwise, our kids and grandkids will inherit a disgusting mess filled with empty debt..... Please pass me the puke bucket!
Posted by: stckpkr7000 | May 4, 2008 11:51:03 AM
Wallpaper Warehouse has all types of genuine fiat curriences in stock and on sale. No fiat curriences accepted, cash only in terms of gold/silver certificates!!!
Posted by: buzlightening | May 4, 2008 12:50:05 PM
Maximo--
(Yeahhhh, what he said!!) Very nicely summed up my friend.
It is indeed just stomach turning at this point, nothing left to say.
Posted by: The Donald | May 4, 2008 12:52:29 PM
Great post.
Sum's up the fed's action's.
I feel like declaring bankruptcy so bank's can swallow all my debt.
I don't have any moral feelings like before that I should honor my debt.
My philosophy in life was that when I die I should not have any debt to my name.
Now
I
Posted by: rsmith786786 | May 4, 2008 3:23:44 PM
"The Fed has created a no-fail environment for big banks and their investors, shielding them from any real world consequences for thier bad decisions, so why not all of corporate America?"
Excellent point! Investment Bank failure wouldn't cripple the country, contrary to what the hoes enslaved to the financial industry wants us to believe.
And it is not only corporate America: Now, politicians want the Fed to assume student loans liabilities for investors.
Quite frankly, this is something the Fed should have bailed out way before Bear Stern.
But short-changing the future of our country is supposed to be acceptable, so BS got the dough and students...well, we'll see won't we?
Posted by: Francois | May 4, 2008 3:43:28 PM
Hilarious. Also, too true.
It's probably only a matter of time before the Fed mission creeps its way into various other sectors of the economy.
Blackwater can't find a buyer? Can't let the private mercenary contractors fail and affect the War on Feelings of Fright. Let the Fed take it over.
Carlyle Capital about to fail? Can't let major weapons industry investors fail because they bet on the subprime market (??). Let them trade in all that bad debt.
KKR not able to roll over its paper? The loss of a group of psychopathic corporate raiders would cause market instability. Let them buy themselves out with Fed-guaranteed loans.
After all, every large corporation banks with the large multinational banks. A failure anywhere could lead to significant stock market disruption.
Posted by: Nick | May 4, 2008 5:07:30 PM
I wish people would stop giving the FED more ideas!!!!
Posted by: MarkTX | May 4, 2008 6:34:16 PM
«My philosophy in life was that when I die I should not have any debt to my name.»
That was a loser philosophy. A winner strategy would tunnel all the assets you can and want to leave to your inheritors out of the country, well hidden, and then become highly leveraged and place some very risky bets. If you win, good, if not, it is the bank's problem, and your assets are safe abroad.
Tunneling is the first and most important skill of an executive -- the little people should learn it too.
Posted by: Blisex | May 5, 2008 3:38:01 AM
«Investment Bank failure wouldn't cripple the country,»
Actually that is quite optimistic an assumption. The whole of the Usian co-prosperity sphere is running on financial capital, and when investment banks function reasonably and are regulated they provide an essential service. Also, the Usian co-prosperity sphere economies are drugged on finance and any sudden withdrawal is going to be painful.
You see, there is a good case for an orderly, slow, managed shutdown of large financial institutions, as long as at least these two conditions are met:
* The salvage operation is not a whitewash for those who have brought about the need to do it. At the very least severe financial penalties and tunneled asset recovery from management and a number of prosecutions.
* The salvage operation is properly accounted for as a fiscal, not monetary, side operation, as it is in effect an expenditure of public funds, not monetary policy.
The current bailout is very very bad because it fails on both points, not because it is entirely unnecessary. Now perhaps the financial system and the Usian economy would survive without damage a collapse of the investment banking sector, but odds are it would be quite bad. However there is a good case that odds are that a whitewash bailout done by the Fed will have in the medium-long term even worse consequences than no bailout.
I am against this bailout, not any bailout, because sometimes regrettably bailout are necessary (most markets are unstable and rigged and need some adult supervision), but this bailout is outrageous and probably worse than no bailout.
Posted by: Blisex | May 5, 2008 3:54:08 AM
«survive without damage a collapse of the investment banking sector»
As to this I wish to make here an important point: that the investment banking sector has not collapsed, it is the insurance banking sector (mostly run by ex-investment banks) that has collapsed.
What do I mean by that? Well, a very profound point that has not been much made (even if I have seen it mentioned peripherally years ago).
The oldest and safest financial scam is insurance: because it allows current management to collect a large inflow of premiums to start with, looking like current management are financial geniuses that are making huge profits and deserve colossal compensation, and then when the insureds come to take their payouts, that's a problem for future management, or in the Republican paradise the USA is now, that's a problem for the Fed to solve innovatively.
That is something that is guaranteed to happen every time someone is allowed to start an unregulated insurance business: take the premiums and run is absolutely the norm. The beauty of insurance is that income is front loaded and expenses are back loaded, and players can arbitrage that to great advantage.
The genius of Countrywide and the investment banks has been to turn their businesses into unregulated insurance businesses. in fact but not in name, thanks to "securitization". Turning what should be business risk into insurance risk is what securitization does, as it replaces the need to assess each risk into its own merit with the convenience of having it assessed statistically by actuaries.
Indeed the ratings-for-sale agencies have in effect been providing unregulated actuarial services for the securitization business, and auditors have been happily accepting the fiction of premiums turning wholesale into profits thanks to insufficient provisions of reserves. The 3 ratings-for-sale agencies and the 3 audits-for-sale partnerships are too crucial to fail anyhow, so PARTY ON.
Then tunneling your firm's capital into compensation and bonuses for management is dead easy: just recognize what are in effect premiums as straight profits by vastly under-estimating the reserves needed to insure the risks for which the company has received the premiums, and laugh all the way to your foreign bank as you cash in stock options and bonuses based on those imaginary profits.
That's perfectly safe, because when the risks mature and losses are incurred and the capital of the company is wiped out because of a lack of proper reserves, the Fed will provide them for free, and without even forcing management to suffer the indignities and risk of a bankruptcy.
Perhaps some state prosecutor will want to have a close look at whether investment banks have been in effect running unregulated insurance operations without insurance charters, enabled by rating and auditing companies to therefore under-reserve against the risks they were underwriting.
But why worry? After the Greenspan Put, the government has invented the Bernanke Cds. Regulatory innovation has never been so successful :-).
Posted by: Blissex | May 5, 2008 4:23:35 AM
"Yahoo Lending Facility"
It's a joke, right?
Fredrik
Sweden
Posted by: Fredrik | May 5, 2008 4:42:53 AM
««survive without damage a collapse of the investment banking sector»
As to this I wish to make here an important point: that the investment banking sector has not collapsed, it is the insurance banking sector (mostly run by ex-investment banks) that has collapsed.
[ ... ] That is something that is guaranteed to happen every time someone is allowed to start an unregulated insurance business: take the premiums and run is absolutely the norm. The beauty of insurance is that income is front loaded and expenses are back loaded, and players can arbitrage that to great advantage.»
As to this two very good illustrations of the concept:
http://www.ft.com/cms/s/0/c8941ad4-f503-11dc-a21b-000077b07658.html
http://www.businessweek.com/magazine/content/06_03/b3967071.htm
Only stupid losers still work to earn money!
Posted by: Blissex | May 5, 2008 7:36:30 AM
It's cute but.....
I'm on record as being reasonably more skeptical than the next guy and satire is my hobby. But there seems to be a lot of stoning of the Fed going on here by every commentator - that while it may be proved to be deserved in the future, has not been yet. For TAF and TSLF are not outright purchases of dodgy collateral at bogus prices, but loans against securities that only might be so. They might in the end be rolled indefinitely, though likely won't. But lets keep a couple in things in perspective - irrespective of historical culpability of the central banks for historically easy money and lax oversight: (1) It is likely that commercial Bank common shareholders and Bank PREFERRED shareholders will be wiped clean before the Fed loses anything other than a financing spread on TAF and TSLF, at which time the Fed will end up as the owner anyway in a Scandinavian-style nationalisation. In this case they could be accused only of ameliorating "the unwind", for no good money was thrown after bad (though bank managers might have been allowed to continue to pay themselves for a while longer)
(2) The Fed really comes lower-down the totem pole in terms of deserved finger pointing for those wanting to blame someone. This administration (8 years of fiscal stupidity) ranks far higher, as do the American people for electing them, and leveraging themselves to points of absurdity and insisting upon cheap petrol. Yes the Fed could have spanked them early, but that is not specifically in their mandate.
(3) Foreign central banks are much more to blame for current bountiful global liquidity. Their accumulation of USD reserves - (artifically keeping USD rates lower than market-clearing) and much of it unsterilized, has down more to boost global liquidity and inflationary pressures than Fed policy.
I hate defending these guys, and would have preferred they used their tools historically in order to have prevented or throttled the size the current predicament, or at least placed pressure on the admin to fiscally clean house, and foreign central banks to stop shenanigans. But the critiques of TAF and TSLF and feds attempts (out of quite legitimate systemic concern) to cushion the unwind, seem over the top for what at present is a reasonable undertaking, unless their detractors are prepared for the Argentina-like dislocations that would accompany rapid unwind, and multiple bank failures - many which would be the result only of a spiral from having to sell position to make position.
Posted by: Cassandra | May 5, 2008 8:20:36 AM
