The last week, the existing financial system was put to the severest of the test and it almost snapped before change of rules midway through the game, gave the regulators some breathing time to fix the leaking taps.
The Fed gave up its resolve not to come to the rescue of the ailing financial institutions, after AIG seemed to be sinking the whole ship. While Lehman filed for bankruptcy, a rope worth $85 billion was thrown at AIG and suitor was found for Merrill Lynch in quick speed time. And sensing that even that was not helping, Uncle Sam threw his smashed hat in the money market mutual fund ring as well. And then announced his mega plan of buying distressed assets from the banking systems, contours of which could be chiseled over the weekend.
But the remedy that really helped the markets get a much deserved breather was the banning of shorts by SEC till October 2. These are some of the other important global events that happened last week.
Þ The 3-month U.S. dollar London Interbank Offered Rate, orLIBOR, saw its biggest one-day jump in 9 years.
Þ The Dow slumped to its lowest level since October 2005 as lending between banks around the globe nearly ground to a halt
Þ The US treasury three month bill were yielding 0.02%, their lowest yield since World War II, indicating the investor anxiety to buy safety at any cost. The rise in Gold also indicates that. All the world's bourses are at multi-year lows. The Yield has since improved.
Þ Gold too spiked as investors panicked. But retreated after investors took note of the Government's resolve to loosen its purse strings.
Þ The California Public Employees' Retirement System will not lend select financial stocks to short sellers.
Þ The New York attorney general has called for an investigation into the short selling of some prominent financial companies, including Goldman
Þ In Russia, officials' suspended stock-market trading for two straight day as the Russian government promised to inject $20 billion to halt a collapse in share prices. The market rose 30% on Friday, their highest ever one day rise.
Þ In China, government officials directed purchases of bank shares and encouraged companies to buy their own shares in efforts to prop up a falling market.
Þ Britain's stock market regulator on Thursday banned short selling in financial companies and said it might extend the ban to other sectors. The move followed the Securities and Exchange Commission's curbs on the practice that went into effect Thursday morning.
Þ France decided to monitor shorts sales more closely.
World's largest bail out is on
In what could be the biggest intervention in financial markets since 1930, the US Federal Government is working on a sweeping series of programs to address the ongoing turmoil in the US and the global financial markets.
The contours of the package would be known by the time the markets open on Monday for the next week.
The new initiative could be on the lines of 'Resolution Trust', which was put in place following the Savings and Loan crisis in the late 1980s. The government created the trust to manage mortgage-related assets owned by defunct banks.
Appreciating the fact that the genesis of the problem are the toxic assets in financial companies, the idea is to buy these from the ailing owners at discounted prices, hold and nurse them to health and then offload it back to the market.
Our take
Don't count the chickens
Þ As companies deleverage, their earnings will reduce. Even if the ailing companies are able to find Oriental white knights, they will be unable to make the extra-ordinary profits. There will be write backs but no real earnings.
Þ The financial-services industry's share of total American corporate profits rose from 10% in the early 1980s to 40% at its peak last year.
Non-Recourse loans
The central bank is taking on a potentially big risk.
The loans that the Fed makes through its discount window via banks, are non-recourse loans. Bernanke may better say his rosary everyday.
Lessons from 1987
History tells us that while RTC was set up in 1989 to tackle the crisis, the markets took one year to bottom out and the housing market took an additional two years to bottom.
So if you are thinking, that the mechanism M/S Bernanke and Paulson are putting in place, will wave a magic wand over the financial woes and the markets will sky rocket, think again.
The buoyancy could last a few sessions, but once the shorts are allowed to be back in the system or another branded cookie crumbles, the markets would be back on their beaten track heading south.
Domestically, we expect 4550 to be a crucial resistance for the markets. Markets are unlikely to runaway to higher levels and we expect derivatives expiry to close around 4250 levels.
No comments:
Post a Comment