There are people out there trying to calm people down. Calculated Risk just wrote a post arguing that most of the recent disasters were really positive steps towards fixing the underlying problems. Other people have argued that all the big shoes have dropped. But question facing the financial markets is “Do you feel lucky punk?”
It is tough to take risks when faced with that kind of question.
The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS halted trading after similar declines.
The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers Holdings Inc. bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent today.
The Finance Ministry attempted to stop the selloff by offering 1.13 trillion rubles ($44 billion) of budget funds to the country’s three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it’s in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.
Bond Market `Closed’
“The bond market remains effectively closed and banks are reluctant to lend to one another,” said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. “The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further.”
The 3 month Treasury bill now yields nothing. The Treasury though will give you your money back …
The fall in Treasury yields came even as the US government indicated that it was going to issue a lot of bills and bonds to help the Fed grow its balance sheet.
When Brad Seter says the 3 month Treasury now yields nothing he really means less then nothing. If you adjusted inflation short term treasury bills have not had a real yield for a while. But now you might as well stick the money under your mattress rather then loan it to the Feds.
But the real story is in the last line. To say that the Fed is going to grow its balance sheet is just another way of saying that it is going to print money. The Naked Capitalist has more.
Perhaps you have heard this….
The Pakistani military has been given orders to “open fire” on US troops crossing the border from Afghanistan to attack Taliban and al Qaeda safe havens, the military’s spokesman said. The order comes one day after Pakistani troops reportedly fired on US helicopters as they attempted to cross the border in South Waziristan.
It sounds serious. But the US does not have to worry about any shots the Pakistanis might fire. It is all hot air. The Nation (A Pakistani newspaper that has been breathing fire over the US incursions) explains why….
The Pakistani military is unlikely to bring its heaviest air defence hardware to bear in any bid to deter such incursions. Already fairly weakly equipped, these forces must remain largely dedicated to defences focused on India. Given the terrain, Pakistan’s heavier air defence assets would also be difficult to bring to bear beyond very isolated point-defence roles. And given their short supply, the Pakistani military would likely be hesitant to put these defences at undo risk of being destroyed.
More dispersed efforts using gunfire (Pakistan does retain anti-aircraft artillery) and Man-Portable Air Defence Systems (MANPADS) would be problematic as well. Using this sort of defence effectively would require a comprehensive deployment along the border, something Pakistani forces probably do not have the bandwidth for at this time. Even if it did, this picket would still be very limited in capability given the limitations of both older MANPADS, anti-aircraft artillery and crude sensors in the rough terrain.
Though it could help with challenging the United States while maintaining deniability, the idea of dispersing MANPADS to proxies is also problematic. So much has been done since 9/11 to secure these stockpiles in places like Pakistan that even Islamabad might hesitate to do so – especially to third parties they do not control, since there would be the risk that MANPADS could be used to bring down a civilian airliner, and that Islamabad could be found out as the source of the weapon.
Instead, Pakistan could now be running combat air patrols with its F-16s over the Federally Administered Tribal Areas (FATA) if there is any truth at all to the news report. Pakistan has yet to secure a deal with the United States to buy new Block 50/52 F-16s, so its patrols are being run by F-16s still operating with the AN/APG-66 radar from the much older Block 15 configuration. They are not ideal, and they are certainly unable to hold up against US. and NATO patrols, but they are better positioned to spot inbound helicopters and ISR flights and give them a scare. In most cases (except when supporting troops already on the ground in Pakistan), the US abort criteria will likely generally be set low, since the United States is not interested in losing aircraft inside Pakistan.
But Islamabad is not interested in losing aircraft, either. Already facing a hostile US Congress over the delivery of the newer F-16s the Pakistani air force wants, Pakistan cannot risk losing the F-16s it does have. This is not simply because deteriorating relations with Washington have, in the past, cut off Islamabad’s F-16s from outside support, but because of a profound military disadvantage against India. New Delhi continues to field new Su-30MKI “Flankers,” which even the newer F-16s might have difficulty handling.
The article goes on to note that Pakistan’s only real lever is its control of the logistical route to Afghanistan that the Americans use. But the article fails to mention the fact that Pakistan is heavily dependent on US economic aid. In Pakistan’s current economic state, it could be destroyed as a nation by the removal of that aid.
So Pakistan leadership has every incentive to look the other way. The only problem is that popular opinion in Pakistan is at a boiling point. Most people in Pakistan don’t care if their economic order will collapse in the event that Americans pull their aid. They cannot tolerate the thought of Americans killing their country men no matter what the cost might be.
I think the Pakistani leadership is trying to bluff its way out of this problem. They are talking big about shooting Americans and yet they are doing nothing. It will be interesting to see how long they can keep this up.
The Federal Reserve is negotiating a $85-90 billion secured bridge loan for American International Group Inc., according to a report on CNBC.
Shareholders would be severely diluted by the bailout that involves the bridge loan. The government would receive AIG warrants for most of its equity in the bailout being negotiated. CNBC said the deal would give AIG incentive to sell its assets quickly to help pay off the bridge loan.
Edit: Its going to happen.
Interbank money market rates climbed to 11 per cent, their highest since a mini-banking crisis in summer 2004.
Chris Weafer, chief strategist at Uralsib investment bank: “We’re in completely uncharted territory where the prevailing emotion is of fear and numbnes. No one knows where this could stop”.
Alexei Kudrin, finance minister, insisted that the financial system was not in a systemic crisis but the central bank injected a record $14.16bn in one-day funds into the money market.
The finance ministry also placed an additional R150bn ($5.8bn) in one-month deposits into the banking system. Konstantin Korishchenko, central bank deputy, told Russian news agencies that the bank and the finance ministry could provide a total of $117.6bn in liquidity to the banking sector.
But market players said banks were ceasing to lend to second and third-tier companies and brokers were pulling credit lines. KIT Finance, big Moscow investment house confirmed rumours that it had been unable to make payment on a series of short-term loans.
UPDATE: John Jansen reports Morgan Stanley’s credit spread has widened significantly and LIBOR is way way up. LIBOR may now be the rate that banks don’t lend to each other at, but the banks do need funding.
UPDATE 2: AIG’s bonds are also trading at Argentina-in-default levels, 33 cents on the dollar.
UPDATE 3: The New York Times suggests that if AIG doesn’t get federal money, it will fail on Wednesday. That is a stark choice: a two day no bailout policy, or the second failure of a large financial institution in a week.
The numbers and the measures become more and more extreme. For AIG to get permission from regulators to move $20 billion in capital from its subs to the holding company and have significant asset disposals teed up wasn’t sufficient to shore up the embattled insurer., The Fed has reportedly convened yet another emergency session to see if the usual suspects might be able to somehow aid the embattled insurer. The Wall Street Journal reports that the Fed has leaned on Goldman and JP Morgan for an emergency $70-$75 billion loan as well.
Below is an advertisement for AIG that ran some time ago. That same insurance company is now asking the Fed’s for a bridge loan and is fighting for its life. If you don’t recognize the words right off the bat look up T.S. Eliot’s “The Love Song of J. Alfred Prufrock”.
We are sorry that Eilot got dragged into this and we would like to point out that it was not our fault. But the irony was so rich we could not resist posting it.
We try to stay away from the presidential race, but this is just too much. How much lower can the political discourse go?