In a shock to Wall Street, by a vote of 228 against and 205 for, the House just failed to approve the latest version of the $700 billion bailout bill. Why? Not enough Republicans backed it -- only 65 Republicans ended up voting for; they were running 2-to-1 against Democrats. Why not? Angry communications from their constituents saying they did not like it and a philosophical bent against bailouts. With the election weeks away, is this the Republicans last stand?

Who knows? But the outcome of the vote means that it's back to the drawing board for the bailout bill. Count me among those who believe that a better bill is possible -- that is, a bill that actually defines the problem(s) we face and offers a truly workable solution. I've posted about such a plan here.

Meanwhile, the Fed has injected $630 billion into global markets in the wake of the cratering of three financial institutions (FIs) in Europe. These include Belgian/Dutch insurer Fortis which received a $16 billion government capital injection; the nationalization of British mortgage lender Bradford & Bingley and $50 billion worth of guarantees for Hypo Real Estate Holding. And the Fed is adding $330 billion to its $290 billion currency swap program with global banks and $300 billion to its $150 billion Term Auction Facility (TAF) emergency loan program.

Continue reading Republicans sink bailout bill, Dow down 500

Republicans sink bailout bill, Dow down 500 originally appeared on BloggingStocks on Mon, 29 Sep 2008 14:38:00 EST. Please see our terms for use of feeds.

Bloomberg News reports that the Fed is increasing its so-called Term Auction Facility (TAF) by 50% to $75 billion. The reason? The program, which makes emergency loans to banks saddled with asset-backed securities (ABS) such as collateralized debt obligations (CDOs), is busted. That's because the TAF is designed to lower borrowing costs but it has accomplished the opposite.

This comes in response to criticism from a Stanford University economist, John Taylor, who wrote in a study last month that there is "no empirical evidence" the TAF has reduced the premium that banks charge each other to lend cash for three months. In fact, last month's TAF auctions were 2.82% and 2.87% -- above the then-2.5% rate on direct loans through the Fed's discount window. This "seeming anomaly" of the higher rate may have resulted from banks' willingness to pay a premium to avoid the stigma of borrowing from the Fed's discount-window.

This means that despite all the happy talk on Wall Street, we are not out of the woods by any stretch of the imagination. As I pointed out here, investment banks and hedge funds borrow $32 for every dollar of capital. If they owned just those dodgy securities, a mere 6% drop in the $6.1 trillion market for CDOs would wipe out their $340 billion worth of capital.

Continue reading Is the Fed's desperation finance falling flat?

Is the Fed's desperation finance falling flat? originally appeared on BloggingStocks on Fri, 02 May 2008 10:34:00 EST. Please see our terms for use of feeds.

Continue reading Despite inflation, Fed says 'relatively low' interest rates necessary 'for a time'

Despite inflation, Fed says 'relatively low' interest rates necessary 'for a time' originally appeared on BloggingStocks on Wed, 20 Feb 2008 18:30:00 EST. Please see our terms for use of feeds.