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Author: Dan Denning Daily Reckoning Aus
--In the battle against a total collapse in the financial markets, global regulators fought back hard over night. First, the U.S. Fed deployed (airlifted?) an additional US$180 billion to foreign central banks. These brave dollar boys marched out as digits over the same fibre optic cables that have made this the first truly real-time global financial panic. --The European Central Bank (ECB) was reinforced with US$110 billion, the Swiss National Bank was bolstered by US$27 billion, while the Bank of Japan was garrisoned with US$60 billion, the Bank of England US$40 billion and the Bank of Canada US$10 billion.
--In sounding its call to arms-and then providing the arms-the Fed aims to achieve the very mission for which it was designed for in 1913: be the lender of last resort when no one else in the financial system will lend to one another. Trust is dead-at least for this week.
--The commercial banks aren't lending. They're fighting to survive. The Sovereign Wealth funds, burned earlier in the year after thinking the bottom was in, are sitting on cash. Private equity is waiting to pick over the carcass of failed firms (or buy firms willing to sell themselves to remain alive.). That leaves only the central banks to lend.
--There are plenty of borrowers. The Bank of New York lent out US$100 billion in overnight funds. But as quickly as the Fed injects liquidity into the system, it bleeds out elsewhere. Investors withdrew nearly US$80 billion from money market funds in the U.S. this week. Total assets held by money market mutual funds fell by 2.5%.
--As you know, money market funds are near cash investments. In fact, you can't get much closer to being in cash than actually being in cash. When investors flee the short-term money market, they are only one step away from losing total confidence in the financial markets. That last step-and we only mention because we expect to see it when regional banks begin to fail in the U.S.-is removing your deposits from the bank altogether and taking your cash home.
--We aren't there yet, though. And the Fed is trying to put an end to the bear market in trust that has gripped Wall Street and the rest of the globe for the last year. Will it work? It certainly cheered investors for a day. The Dow was up nearly 400 points. Stocks are up in early trading here in Australia.
--But the Fed is fighting a liquidity crisis. It's the wrong war, and it may not be a war it can win without reigniting inflation (more on that below). What we're really facing is solvency crisis. Making more credit available will not improve the quality of the assets that have thrown the entire financial system into turmoil to begin with (American houses).
--Two other regulatory steps helped avoid a total rout on Thursday. First, regulators in the U.S. and the U.K. moved to halt short selling. Bloomberg reports that, "Financial regulators in the U.S. and U.K., attorneys general in New York, Texas and Connecticut, and the three largest U.S. pension funds are cracking down on short sellers in the wake of the collapse of Lehman Brothers Holdings Inc. and American International Group Inc."
--Right. It's the short-sellers who are responsible for the destruction of shareholder value at Lehman and AIG. It's the short-sellers who insured mortgage-backed securities. It's the short sellers who bought that debt with shareholder capital.
--It's really embarrassing when hard-nosed so-called capitalists on Wall Street play the victim card and blame their just deserts on short- sellers. Then they go crying to big Nanny State for a bailout (paid for by taxpayers). Disgraceful. The animal spirits of capitalism in America have morphed into suckling lap dogs.
--Don't get us wrong about short selling. Here in Australia we're shocked a bit that there is not more transparency regarding the size of the sort positions as percentage of a stock's float. The shorts need to be better reported. But shorting a stock is a useful way of holding the management accountable for being bad. Blaming the shorts for the collapse of the investment banking model (borrow, leverage, repeat) is like blaming gravity for falling on your face when you're drunk.
--No matter. The tough-talk against the naked shorts prompted a rebound in many of the financials we wrote about yesterday. But there are still serious concerns. For example, mortgage-lender Washington Mutual is having trouble finding a buyer. WaMu does not appear to have a dowry desirable enough to attract even an ugly husband.
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