UPDATE: 09-16-08  THE FED DID NOTHING -- TARGET RATE TO REMAIN THE SAME

Concurrently with pumping billions into the banking system and in spite of the sharp rise of overnight interest rates, the Fed did what they do best -- nothing.

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent."

"Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth."

For those wishing to read the full statement in context, it can be found on the Federal Reserve's website.

Reuters had it right ...

"Markets fully expect a quarter-point Fed interest rate cut on Tuesday as indicated by short-term rate futures. Some believed that if the Fed's rate-setting Federal Open Market Committee decided to lower borrowing costs, it would do so decisively to send a convincing message to markets. 'If the FOMC does opt for a rate cut, 50 basis points is much more likely than 25 basis points, which would be seen as a token gesture in the current climate,' economists at Goldman Sachs wrote, adding they believe a no change in rates is the most likely outcome."

Original Blog Entry ...

While we see breathless reporting on how the Federal Reserve, the Treasury Department and the head honchos of the largest banks and brokerages in the nation desperately fought Sunday evening to avert an economic catastrophe of biblical proportions, we might take a few minutes to consider just who the hell we are rescuing.

Blood in the marketplace …

When the stock market opened Monday, there was blood in the marketplace and the sharks were swarming as sure as if they were in a money-chummed sea. Certain people, not the average American citizen, were gleeful: the United States was being taught an economic lesson, the democrats were happy as punch that this financial meltdown had occurred during the Bush Administration, and the wealthy and the powerful reveled in joy as they massively shorted the market to create a loss of 504.48 points in the Dow Jones Industrial Average  (-4.42%) which closed at 10,917.51. The NASDAQ was off only 81.36 points to close at 2179.91 (-3.6%) and the S&P averages were down 59 to 1192.7 for a loss of 4.1%.

The global pool of capital and its master manipulators had seized on the massive media perception of panic and shorted the market to make enormous profits on the backs of the shareholders of companies whose finances and operations at the end of Monday evening were almost exactly the same as they were when the stock market closed on Friday. Shared pain caused by massive selling across the board, if you will pardon the pun.

Ben Bernanke’s Federal Reserve found even more creative ways to dump quasi-public money into the banking system. I say quasi-public because the Federal Reserve is a private bank owned and operated for its member banks – which just happens to have a charter to regulate government currency.

Lehman Brothers …

And in the end, nobody wanted to rescue Lehman Brothers. Boo Hoo! Lehman brothers which was said to be responsible for the creation for the creation of an $88 BILLION portfolio which represented an outrageously leveraged investment on $22.5 BILLION dollars in shareholder equity. A leverage ratio which insured that the institution was doomed if the portfolio declined only 25.6% in a marketplace where such paper was virtually worthless as buyers, in spite of the Federal Reserve’s liquidity injections, could not be found.

Protecting those at the top …

And, this is pure speculation on my part, nobody in these high-level meetings probably suggested that the management of Lehman should be going to jail for screwing their shareholders – and the American public by extension.

These nabobs were, in all likelihood, commiserating with club member Dick Fuld, as Lehman’s largest stockholder, was said to have lost a reported $582 million in personal net worth since November, 2007 when the screws were beginning to tighten on the nation’s credit.

But don’t cry for Fuld or any other of the club members, they still have wealth and the power that it confers. Again, according to published reports, As of Friday Fuld could leave Lehman with as much as $65 million dollars as well as all of the outrageous sums of money he has steadily earned over the intervening years.

But he wasn’t alone…

Apparently, few at the top were watching out for their shareholders while big-money derivative sales to pension funds, mutual funds and insurance companies were being booked created outlandish salaries and bonuses. In some cases ousted executives were given golden handshakes that rewarded them for a lifetime of service and the eventual screwing of their shareholders. It has been reported in the media that Chuck Prince, CEO of Citigroup, received a nice $40 million dollar package; Stan O’ Neal, CEO of Merrill Lynch, received approximately $160 million dollars in goodbye money and Jimmy Cayne of Bear Stearns walked with approximately $30 million. Who knows how much they actually made as their firms crashed and burned.

It has been widely reported that Cayne and his wife sold their 5.6 million shares for approximately $61.3 million in March of this year. A far cry from their $1.2 Billion dollar value in November of 2007 – but still enough to stave off any wolves who might show up at the Cayne’s door.

I wouldn’t mind so much if these people went down swinging – fighting to save their respective companies. Well some of them may have actually gone down swinging as Stan O’ Neal was said to have spent a tremendous amount of time playing golf during financially-trying times and Cayne was said to helicopter out to the links after leaving the office to play 18 holes while there was still light.

AIG?

And speaking of insurance companies, one of the largest insurers in the world, AIG (American International Group) is said to be in desperate need of capital to meet its actuarially-mandated reserves. Just a guess here, but how much of this toxic paper can you assume they have on their books. All rated AAA-investment grade paper by the ratings agencies who were paid by paper creators to provide a realistic measure of “goodness” based on their outdated statistical models and data. To be fair, all of their data was based on a time when mortgages were underwritten on a prudent and sound basis and when HELOCs (Home Equity Lines of Credit) secured by the same underlying asset could be used to make mortgage payments to forestall the inevitable or when continuous re-financing could mask growing consumer defaults. You not once heard the mortgage companies complain as they made those juicy commissions which resulted in loan managers with hot crews making up to $100,000 per month or more!

In the case of AIG, unless they come up with more cash to shore up their dwindling finances, they too will be forced into bankruptcy. Much of AIG’s exposure to loss is said to be related to credit default sways which are insurance-like contracts to insure against defaults on corporate obligations. The good news is that the counterparties to these transactions are the same Wall Street companies who issued the specious paper in the first place – thus making it unlikely that they would make a strong demand that AIG raise additional capital to insure their survivability. The pressure will come for the regulators and, unfortunately, they operate on the Bush Administration’s current fiscal regulatory policy that less is more.

So who is it that we are really bailing out?

Yes, we are bailing out some of the bad guys, but in many cases we are bailing us out; the ordinary people of the United States who have invested our pension money in banks, mutual funds, stocks and bonds which have been deeply affected by the decline in the financial marketplace. Invested by those who have touted themselves to be investment professionals, operating from rock-solid firms who are said to be risk adverse and concentrating on prudent investments. How much of our hard-earned savings, prudently placed in a bank for a rainy day have been eroded by burgeoning inflation as more and more dollars are being artificially created and pumped into this slush pit of toxic garbage?

The other shoe …

In addition to creating new and fanciful names for lending treasuries to banks and brokerages, to be collateralized with toxic paper, we await the Federal Reserve’s FOMC (Federal Open Market Committee) meeting to be held later today. (September 16, 2008).

By approximately 2:15 p.m. (EDT), we will know if the Federal Fund Target Rate will be further reduced thus insuring that the banks and other financial lenders make additional profits as they soak the average consumer with higher and higher interest rates. Or, if they will raise the rate to fight growing inflation and help shore up our weakened dollar. Or, as economists are wont to say, on the other hand, they simply do nothing and hope the language contained in their meeting release will shore up already shaky markets.

The Federal Reserve is now operating to juggle its two prime mission components: keep inflation in check and to stem the tide of job loss. All overlaid with a political component exacerbated by the upcoming presidential elections in November. 

According to my numbers based on the September 15, 2008 H.15 Report (9/12 data), the Federal Reserve would have to raise the Federal Funds Target Rate by 87-basis points (5-year outlook) or 164-basis points (10-year outlook) to return to a neutral inflationary stance.

Since short-term inflation does not seem to be a pressing concern when measured against job losses and the potential of increasing bank failures, it looks probable that the Federal Reserve will do what they must to stabilize the current financial markets. If they decide to move, it will probably be a cut of 50-basis points in the Federal Funds Target Rate. Of course, they can do little or nothing at all… which has been a pattern of practice since the days of former-Fed Chairman Alan Greenspan who has suddenly regained the ability to speak clearly about why he shouldn’t be blamed for the current crisis and carried forward by his hand-picked acolyte, Ben Bernanke.

What can YOU do?

Unfortunately, there is very little we can do while giants slug it out on a playing field far above our understanding and expertise. The smartest advice, which is counter to what the economists are hoping you will do, is to reduce your personal run rate and postpone any significant purchases unless they can be obtained at a large discount.

Protect yourself by diversifying your investment portfolio. Choose a trustworthy investment adviser who does not earn a commission on what they recommend. Disregard all of the BS about a firm’s strength – as we can plainly see trusted firms going up in smoke.

Wait and watch, like the rest of us, as the Federal Reserve and the Department of Treasury tackle our economic problems.

Since the Bush Administration is winding down, it is important to elect a President who will not kill our fragile economy with bigger government, increased taxes and a ramp up in entitlement spending. Or spend money in areas guaranteed to produce little or no return: global warming for one. We need energy independence and that will come with increased drilling and the re-introduction of nuclear power plants. We need to avoid any energy source which requires massive government subsidies, tax advantages, grants and artificially-manipulated pricing to make it seem to meet today’s and tomorrow’s economic requirements.

Be safe, be well and be vigilant.

-- steve

Quote of the day: “In my many years I have come to a conclusion that one useless man is a shame, two is a law firm, and three or more is a congress.” -- John Adams

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