Sunday, March 16, 2008

Words that don’t exactly calm the financial markets

“The Fed's emergency funding procedure was first used in the Depression and has rarely been used since.” --Margareta Pagano, Business Editor, The Independent

“Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run”--Paul Krugman, New York Times

“Panic swept the credit markets on reports of an insolvency crunch at both the US investment bank Bear Stearns”--Ambrose Evans-Pritchard, The Telegraph

"to prevent an implosion of the mortgage finance industry and head off a full-blown economic crisis"--Ambrose Evans-Pritchard, The Telegraph

“a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of default”--Edmund L. Andrews, New York Times

Those are just a few of the quotes of the last few weeks when it comes to what’s happening in the world’s financial markets.

Terms like Panic, default, bank runs and depression, hardly the lexicon of those looking for stability and reassurance.

Was last week the watershed week for those markets, the week of hell that will settle things down once again. Or is the uncertainty set to not only continue, but to accelerate?

That’s what many are asking this Sunday with the North American stock markets set to open for business again on Monday morning, all in the wake of last week’s remarkable events in the money markets.

First the week started of with the US Federal Reserve, the Central Banks of the major European economies of the world, and including the Bank of Canada pouring over two billion dollars into the financial markets. That move on March 11th was not the first time that the major Central Banks had stepped in to try and allay fears, yet last week certainly was anything but calm.

The latest move by the Central banks seems to have been about as successful as my 649 strategy, where I put up the money and end up with nothing but a bunch of paper at the end of the week.

Such it seems is what has become of last weeks cash infusion.

On Wednesday, one the large financial houses of New York City, Bear Stearns once one of the major players in American finance was busy reassuring investors that they would have more than enough liquidity to handle any circumstance.

By Friday, the US Fed had started a rescue program designed to head off a full fledged panic on Wall Street, teaming up with JP Morgan Chase to try and keep the Bear Stearns ship afloat.

The stock markets didn’t particularly respond well to that development, with the market closing lower on the trading day.

Over the weekend, the Fed began intense discussion with officials at JP Morgan to try and get the Bear Stearns troubles off the front pages. By Sunday evening the announcement came out that the Fed would approve a $30 billion credit line to help engineer the takeover of the teetering financial house.

JP Morgan Chase will apparently pick up the stocks of the tumbling company for 2 dollars a share, a far cry from the 60 dollar mark that Bear Stearns was asking per share only a week ago and a total free fall from the 170 dollars that the shares were getting only a year ago.

As the news spread about the rescue plan the Asian stock markets made a reply, as they dropped between three and four per cent in early trading.

Up next will be the European markets, which will cast their votes shortly on the latest attempts to get a handle on the credit crisis that has been dogging these markets over the last few years.

What investors, pension plan administrators and nervous citizens want to know is whether there are any more of these Bears in the financial woods. Nervous financial executives fear a domino effect taking place where other financial houses, in similar straits as Bear Stearns, begin to take on water. One wonders how much room is left to help with the bailing.

The sea of red on the financial maps of the business channels on Sunday night is not a good omen for North America’s opening bells. The unprecedented intervention of the US Federal reserve into the day to day trading status of America’s financial houses is indicative as to the seriousness of the situation.

What remains to be seen is if it’s enough to control what at times seems like a runaway horse galloping at full speed in the wrong direction.

Monday morning is going to be a very interesting bit of time on both Wall and Bay streets, as the financial traders and institutions try to come to terms with the reaction that has washed across the globe from Sunday’s interventions.

Will Monday prove to be just another financial hiccup or will it be one of those historical days we talk about for years to come? Opening bell is at 6:30 Pacific time, we'll have a good idea shortly after.

New York Times--The Face-Slap Theory

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