Weekend Bailouts and Subsequent Market Reactions
Another weekend, another bailout, another market reaction:
How many Sunday press releases is it going to take to save the financial system from ruin? If you’re are keeping score at home, this is now the sixth Sunday night/Monday morning press release in 14 months aimed at saving the financial system. Consider the recent history of these weekend rescues:
• August 2007, when the credit crunch was officially recognized by the Fed, when they cut the discount rate.
• December 2007, with the announcement of the TAF and other credit facilities;
• January 2008 Soc Gen panic, and a 75 bps emergency cut;
• March 2008 with the Bear Stearns bailout.
• July 2008 the first Fannie/Freddie rescue attempt
• September 2008 the actual Bailout of Fannie/Freddie
Six observations/questions/takeaways from the past of weekend rescues history:
1. A strong rally lasts for a while, but it eventually fades and makes a new lower low;
2. Each "rescue rally" has been shorter in duration and weaker in intensity than the immediately prior one;
3. Friday's close becomes your new line in the sand; If and when that is breached, look out below.
4. The pre-Asian open news pattern reveals the Asset price focus is a large part of these issues; It also speaks to our overseas creditors/Overlords;
5. What form of free markets have we evolved into? It is not Capitalism, it is not Socialism, it is not intelligent regulation. WTF is this?!?
6. During the prior 5 interventions, the VIX was at cyclical record highs. This time, the VIX was at a much more modest level (22)
Lastly, who wants to bet me that this will be the very last bailout? Any takers? Any?
~~~
UPDATE SEPTEMBER 8, 2008 11:55AM
Jake whipped up this chart for us on the subject:
Monday, September 08, 2008 | 07:17 AM | Permalink
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Comments
It's getting f'ing hard to hold on to these shorts, every time spx gets 1200 in sight the damn feds come and bail someone out... spx 1350 is looking like a disticnt possibility now - so do we stay short or do we cover.
What say ye Barry? Will todays rally fade at the open? Fight the fed?
~~~
BR: I covered back in July !
http://bigpicture.typepad.com/comments/2008/07/wild-times-on-w.html
Posted by: steve from asia | Sep 8, 2008 7:26:48 AM
I hesitate to say it aloud, but with our collusion between corporations and the government - industry lawyers writing legislation - and squashing of rights - wiretaps on our own citizens - it appears we are becoming more and more....
FACIST.
My grandfather would roll over in his grave if he knew.
Posted by: Peterpaul | Sep 8, 2008 7:28:04 AM
I think I read something about the RNC Convention platform having a statement on the government NOT bailing out corporations.
Ford, which has been making overtures for a few years now, wants the government to loan it money.
This isn't how a free market works. If you mismanage that's your fault. Don't use taxpayer money to pay for the sins of a few.
Posted by: Richard | Sep 8, 2008 7:41:29 AM
Putting lipstick on a recession makes it look quite attractive.
Posted by: Jack | Sep 8, 2008 7:44:55 AM
I think in a post Marxist world we can rule out the label of fascist. Maybe we should just call it an establishmentarian economy. Big Money, Big Auto, Big Ag, ...
Posted by: jo sebek | Sep 8, 2008 7:52:09 AM
Is anyone willing to consider the alternative case here ? Not just the catastrophe if Frannie was allowed to fail but that intervention is a necessary government function. Even more broadly that markets don't exist without a government institutional framework on which to build them. One doesn't get upset over having publicly provided police, fire or ambulance services. Or state highways or any of a myriad other public services including a legal system,a military and so on. Ask yourselves would markets even exist without private property rights, without a court system to resolve disputes, without a regulatory framework to define standard measures of product and acceptable behaviors. The question is not whether regulation and intervention is necessary but it's nature, timing and extent. Consider that we've all wallowed in the benefits of Frannie's excesses and greeds since we all were likely investors who rode the bull markets up since '04, which wouldn't have happened without the Housing put which was enabled to a great degree by Frannie. For anybody who makes their living off of markets to object to regulation is a tad disingenuous. Not least of the reasons being that letting Frannie go would not only collapse the markets but would indict the credit-worthiness of the US itself:
http://tinyurl.com/5qbc44
A review of all the inter-connections and consequences plus some good readings. But if you read nothing else read Bob Solow's review of Kevin Philips book "Bad Money" here: http://tinyurl.com/56ojml
One of the world's great economists takes apart a very bad polemic and in the process explains how and why markets work and what kind of reforms you ought to be pushing for.
Posted by: dblwyo | Sep 8, 2008 7:54:52 AM
Probably time to think about bidding for SKF in the 90 area or under (prior low). I'll probably cover the short today.
This kinda reminds me of 2001 and you know what happened after that.
Posted by: txchick57 | Sep 8, 2008 7:54:57 AM
"5. What form of free markets have we evolved into? It is not Capitalism, it is not Socialism, it is not intelligent regulation. WTF is this?!?"
Corporatism. (...which is what Mussolini called fascism...)
Posted by: t | Sep 8, 2008 8:01:34 AM
Dr. Hussman's musings this morning I think are very close to the way I see it too...
Deja Vu (Again)....
http://www.hussman.net/wmc/wmc080908.htm
His best estimate at present is that this bailout will cost the taxpayer 250 billion dollars...
This is still a liquidity crisis...and if you think of it as a RELATIVE crisis as I do it becomes more clear...even though the fed funds rate is now two per cent, the actual costs of borrowing and the eligibility of borrowers for credit is much more stringent than 2 years ago....so there is a liquidity crisis, even if not of Paul Volckerian dimensions....I don't think the bailout changes things greatly...are you now via the GSE's going to offer 100% financing?? I think not..
Good luck....
Bruce in Tennessee
Posted by: Bruce | Sep 8, 2008 8:01:40 AM
All the king's horses and all the king's men couldn't get Humpty Dumpty over SPX 1350. Don't jump in too quickly on the short side here, there are more fools who want to get long than you can shake a stick at and there's gonna be a lot of happy talk.
Patience.. I just looked at GDX up 15% in the pre-open. Wow!
Posted by: leftback | Sep 8, 2008 8:05:33 AM
It is "statism". The question is to what degree. With our present system being a mix of economic socialism and fascism backed by debt-based fiat currency, the defining factor is one of legal ownership. Fascism is a system characterized by highly regulated private ownership of the means of production and goods. This bailout is now more socialism. And a bad joke. Only government promoting an "ownership society" could create something this FUBAR.
Posted by: JH | Sep 8, 2008 8:09:08 AM
BR: this is a mixed economy however much we want to pretend otherwise. History is littered with such bailouts Continental Illinois, the railways, Chrysler, Savings and Loan, the Airline industry after 9/11 et al. The reality is that despite all the conservative posturing about free markets, moral hazard, etc when it gets to the short strokes govt has no option but to step in and save the situation because the impact on people, institutions and the very functioning of the country are dependant upon it. Basically we need the govt however much true red blooded Americans try to decry it. If we'd only grow up and recognize that life would be much simpler and we'd avoid a lot silly factional squabbles we get into. Capitalist free markets are great but they need the govt to act as a governor as on a diesel engine. In the case of F/F as I repeatedly point out here, they are NEVER going to disappear because they perform a vital function. Personally I think they should be fully nationalized and run as public corporations and this will never happen again provided they are properly supervised.
As to the next bailout target, look at Detroit. All these companies are up the creek without a paddle. It's going to take years to develop the new cars and equally important a new business model to move into the new era of auto manufacturing and they don't have enough capital to keep functioning. Should we do it? Probably, although I'll admit it's a bit more borderline than F/F, but if you want to retain a domestic auto industry it's probably necessary. If these companies went down the dislocation across the mid west would be huge because of all the downstream ops. It's amazing how the most conservative free market capitalists (Hank Paulson, George Bush) become regular little socialists when the rubber hits the road but as someone once pointed out reality has a liberal bias.
Posted by: John(2) | Sep 8, 2008 8:09:52 AM
@leftback. Don't be so sure about that 1350. I wouldn't be suprised to see 1400+ before the election. Not betting my money on it but I've seen crazier s&**(( before.
Ya'll be happy. It will make for a boffo shorting opportunity.
Posted by: txchick57 | Sep 8, 2008 8:15:06 AM
Taking money from the poor to give to the rich is Feudalism. What's funny is that most people don't realized that they are being robbed because this is a form of deferred pilfering. The mainstream media either doesn't understand, or is unwilling to tell people exactly what kind of a disaster this is, nor do you see the finger of blame being pointed to Wall Street or the Federal Reserve. Mostly, what you hear is that this will lower mortgage rates and help support housing, therefore this is a "good thing".
Posted by: newjerseydoc | Sep 8, 2008 8:16:30 AM
dblwyo, are you willing to personally pay for it though? Are you willing to forfeit 10% of your income so that the people that run Fannie Mae and Bear Stearns and Lehman Brothers can keep operating? Frankly, I'm not. I know it'll happen though. Again, the middle class gets hosed.
Perhaps the key is to make sure no company ever gets large enough to the point that it requires government intervention if it goes feet up. Not sure how you do that however.
Posted by: rj | Sep 8, 2008 8:16:40 AM
I'm not sure on what the name for this is. We have quasi-public institutions that buys mortgages that ran into trouble and is now being made fully public. The stakeholders in the now public institutions include American banks, foreign banks, and foreign sovereign governments.
Perhaps a hopeless name such as "free markets with a twist".
These past couple years though has shown me something negative. It's obvious that government cannot be allowed to entirely control business. I think it's been made clear that we also cannot allow business to entirely control government, otherwise we get episodes like this. How do you do that though?
Posted by: rj | Sep 8, 2008 8:24:15 AM
You get em Barry! You're a voice of reason and this entire manipulated pig of a market and financial market makes me sick and pissed off.... Can you bitch slap Cramer for me? He is truly a complete joke!
Posted by: stckpkr7000 | Sep 8, 2008 8:27:27 AM
I am not American, nevertheless it is very painful for me to see a once great country go down the drain IN LESS THAN A SINGLE GENERATION.
I am european, but not of the socialist kind, rather a Mises, austrian economics guy. Reading this and other similar blogs, I am amazed at the overconfidence, naivete, blindness of the american public opinion, even of the ones writing in or reading blogs like this one, blogs that are critical of the present abuse and mismanagement of the american economy.
I am amazed because I believe things are way worse than what is expressed in very critical blogs like this one. It is not only whether there will be a Great Depression or not (very likely)...even more important than that is what brought America to this point.
It is about the incestuous relationship between the financial elites of Wall Street (well the West Coast too courtesy of PIMCO and friends)...and the supposedly servants of the american people, the USA Government, and its institutions (among them in a remarkable role the FED).
Americans, instead of being told the truth, that for decades the country been spending beyond its means, continue to be induced to consume in order to maintain the Ponzi Scheme of american finance running a bit longer. All for the benefit of the Masters of the Universe that milk the american economy to self-destruction. And when this self-destruction has finally arrived, very basic principles of decency and accountability have been and continue to be disregarded in an attempt to protect the elites from the terrible mistakes, crimes, that they have inflicted on America.
This goes way beyond subprime, alt-prime, CDOs, etc. etc....starting in earnest perhaps with the Greenspan tenure at the FED, the whole american economy has been used as a backstop for a bunch of thugs in the financial sector...socialism for the rich but on a scale big enough to ruin the present day's (already yesterday's) Rome.
It is not only Republicans (although they certainly have earned the first place) that are at fault, Democrats too. I do not see neither in McCain or even Obama, the kind of clear thought that can stop and attempt to reverse the damage done. It is as if the whole country had become victim of an Orwellian nightmare. Land of the Free? Where are the economics PhDs denouncing this economic crime? Paul Vocker has been perhaps the only one saying what has to be said (and in my view not strongly enough)…but who listens? Anybody with power or influence, has been bought one way or another by the financial elite.
I believe that, when in the future historians write about this age, they will conclude, among other things, that a financial mafia took over the US Government, political parties (both), academia, etc., so that a tiny elite could syphon huge profits at the cost of destroying the american economy. They infiltrated everything, from academia, to the methods used to compute inflation and other macroeconomic variables, to how financial information is disseminated (CNBC Ministry of Truth), in order to confuse and misinform, to deceive a whole nation. That the nation had become decadent, complacent and lazy certainly helped.
Now, this is not a socialist point I am trying to make...only an old fashioned classic capitalist one. America today is not a capitalist country, not even a democracy, not the Empire of the Law. It is a semi-mafiose country in which ordinary, decent, hard-working americans, are being taken to the slaughterhouse by a tiny elite of crooks that have corrupted the whole country. A fascist state.
Do something for God's sake!. Wake up! We europeans also belong to a common Western heritage...it saddens me to see the USA go to hell because of a bunch of financial terrorists.
Posted by: WakeUpAmerica | Sep 8, 2008 8:34:21 AM
Buying commodity and energy shares this morning. These shares are very oversold, many are attractive on a dividend basis. They still have fairly positive fundamentals. And this stimulus is bullish for commodity prices.
I think we will have more bailouts but who is going to bail us out?
This will all come to a head next tuesday when the fake Fed meets and the real Fed (GS) reports...
Posted by: Vermont Trader | Sep 8, 2008 8:43:22 AM
become regular little socialists when the rubber hits the road but as someone once pointed out reality has a liberal bias.
-------------------------------
Conservatism thrives on rule making and preserving the status quo for those who have. Liberalism is for the exceptions and the have nots.
Ironically, people get more conservative with age just as their understanding of human nature should make them more liberal. Since the Western world is ageing, this contradiction will only intensify!
Posted by: D. | Sep 8, 2008 8:46:11 AM
I always thought you needed capital to have capitalism. Maybe its debtism (or some other nice word for slavery).
Posted by: Keith | Sep 8, 2008 8:50:54 AM
FDIC probably next on the Sunday announcement calendar...
http://www.fdic.gov/news/news/press/2008/pr08078.html
Bruce in Tennessee
Posted by: Bruce | Sep 8, 2008 8:57:15 AM
Dow future up 286.00 right now. Still waiting for the emergency 75bps rate hike. Not gonna hold my breathe though...
HCF
Posted by: HCF | Sep 8, 2008 8:59:00 AM
Stop already with the fascism and socialism. We have a market economy that is managed or mismanaged as it has been in the Bubble era. Given the chaqnce there are always members of the governing class and the financial community that are eager to juice the economy. Our trust in upper most gov't and corporate management has enabled Ponzi schemes, public and private to flourish.
Posted by: zell | Sep 8, 2008 8:59:38 AM
oLockhart said yesterday that the new term facility to the 12 Reginal Feds won't be used. My God, do these people actually think we are stupid?? He knows it will be used because the regionals have told him look out below!!. As a matter of fact who wants to take a bet that this will be the Sunday October 11 announcement from Paulson?
I didn't think so.
Posted by: Flash Foraward | Sep 8, 2008 9:00:33 AM
