by Calculated Risk on 10/09/2008 07:06:00 PM

Something a little different ...

Tomorrow morning the Department of Commerce will release the trade deficit report for August. Some people might be looking at this report to see the impact of falling oil prices and slowing export growth.

It is helpful to remember that oil prices peaked in July, but there is a lag between spot price and import prices. Therefore I expect import oil prices to be a little higher for August than July.

Click on table for larger image in new window.

This graph, based on data from the EIA, shows the weekly spot prices for oil weighted by import volume.

I expect that the collapse in oil prices will not show up until the September trade deficit report.

Oil prices fell even further today, from the AP: Demand destruction: Oil prices drop to 1-year low.

And export growth may be slowing, but I don't expect to see much evidence in the August report. If we look at container traffic at the Los Angeles area ports, exports were still strong in August.

So the trade deficit tomorrow probably won't show either the impact from falling oil prices or slowing export growth. Just something to remember when we read the news reports.

by Calculated Risk on 10/09/2008 05:49:00 PM

From the WSJ: Text of Citi Statement on Wachovia Deal

Citi announced today that it had reached no agreement with Wells Fargo following several days of discussions about matters related to Wachovia. The dramatic differences in the parties' transaction structures and their views of the risks involved made it impossible to reach a mutually acceptable agreement.
...
Citi believes that it has strong legal claims against Wachovia, Wells Fargo and their officers, directors, advisors and others for breach of contract and for tortious interference with contract. Citigroup plans to pursue these damage claims vigorously on behalf of its shareholders. However, Citigroup has decided not to ask that the Wells Fargo-Wachovia merger be enjoined.

The key points are: the negotiation is over, Citi will not try to stop the Wells acquisition of Wachovia, and Citi will pursue damages.

by Calculated Risk on 10/09/2008 03:29:00 PM

The Dow Jones Industrial Average is now below 8900 8800 8700.

The S&P 500 is off 40% from the peak of last October.

Krugman says:

Stock prices are, however, the least of our worries. The money markets are frozen; the TED spread is 4.14%. (CR: now 4.23)

G7 meeting tomorrow, IMF-World Bank over the weekend. Now is the time for major action — an announcement of coordinated capital injections, liquidity measures, and more. If we’ve had nothing except vague assurances by Monday ...

by Calculated Risk on 10/09/2008 01:02:00 PM

From Reuters: Treasury may capitalize banks by end October: source

The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.
...
White House spokeswoman Dana Perino said later on Thursday that Paulson is "actively considering" capital injections into troubled U.S. banks.
...
The source familiar with Paulson's thinking said Treasury was working "extremely fast" to put together a capital injection plan ... the injections would likely be made public ...

Here we go ...

Also Roubini explains: How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced - indirectly through the back door - into the TARP legislation

by Calculated Risk on 10/09/2008 11:16:00 AM

“What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking.”
Geir Haarde, Prime Minister of Iceland

Update from Reuters: Iceland PM asks public not to take out lots of cash

"I want to emphasise ... that people remain calm and understand that the transaction system is fully functioning and deposits are safe," Haarde said.

"I also ask the public not to withdraw large sums of money from the banks. It will make things more difficult."

From The Times: Iceland seizes Kaupthing as meltdown continues

Crisis-hit Iceland has taken control of Kaupthing, its biggest bank, and suspended trading on its stock exchange for two days.

With the nationalisation of Kaupthing, the Icelandic Government now has control of all three of the country's big banks — Kaupthing, Landsbanki and Glitnir ...

The OMX Nordic Exchange Iceland said it will not re-open until Monday, due to “unusual market conditions." Meanwhile trading in the Icelandic crown ground to a halt.

by Anonymous on 10/09/2008 09:52:00 AM

I will have you know I had a cup of coffee this morning. For the first time in about a month. I am sure that any of you long-term caffeine addicts who have ever had to quit cold turkey for an extended period of time will understand why this fact demands celebration. For me, for the rest of my days, "PPI" will no longer mean Producer Price Index--who cares about that?--but Proton Pump Inhibitor, which is a wonder drug.

At any rate, while I still lack the key qualities of a decent blogger--energy, wit, intelligence, stamina, the attention span God gave a rutabaga--I wanted you to know that I'm still here and in the process of crawling out from under a nasty bout of weather. Who knows but what I might even have something actually relevant to say in the near future? Bear with me, forgive my absence, and I'll try to ease myself back in to regular blogging.

To all of you who have sent messages and inquiries to me and to CR, let me say that your kindness and warmth has meant a great deal. The Pig and I are grateful. (OK, well, mostly me, but the Pig tries to be grateful.)

Now, back to the TED Spread . . .

by Calculated Risk on 10/09/2008 09:05:00 AM

Here is the TED Spread from Bloomberg. The TED spread hit a record 4.13 this morning. This is far above the highs reached during the previous waves of the credit crisis.

Note: the TED spread is the difference between the LIBOR interest rate and the three month T-bill. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

From Bloomberg: Libor Dollar Rate Jumps to Highest in Year; Credit Stays Frozen

The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest-rate reductions worldwide failed to revive lending among banks for any longer than a day.
...
The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest level since Dec. 28. The Libor-OIS spread, a measure of cash scarcity, widened to a record.

The credit markets are still in severe distress.

by Calculated Risk on 10/09/2008 12:45:00 AM

From the NY Times: U.S. May Take Ownership Stake in Banks

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system ...

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The proposal resembles one announced on Wednesday in Britain.

This would essentially be the plan supported by most economists.

by Calculated Risk on 10/08/2008 08:34:00 PM

From my brother:

"Politics is the art of looking for trouble, finding it everywhere,
diagnosing it incorrectly, and applying the wrong remedies."
Groucho Marx

And unrelated from the Daily Show (15 seconds):

by Calculated Risk on 10/08/2008 06:55:00 PM

There has been some more discussion today that the Emergency Economic Stabilization Act (EESA) allows for a UK type recapitalization plan (see Krugman: To do, not to do). The UK plan is more along the lines recommended by most economists, and many economists are looking for any hint that the TARP might become a recapitalization plan.

Krugman points us to Justin Fox at Time: Treasury prepares for a TARP-and-switch. And it's a good thing, too

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"?

Here is Paulson's prepared statement:

Specifically, the EESA empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability.
emphasis added

Paulson clarified this somewhat in the Q&A (transcript from CQ Politics)

QUESTION: The EESA program, do you think it will help -- the purchasing program, troubled asset relief program, will it help much to rebuild the capital base of the financial institutions?

PAULSON: Yes. Yes, that is -- that’s what’s -- what’s critical. There is -- capital has been reluctant to come into certain financial institutions, because a lack of visibility, in terms of the uncertainty, in terms of the value of -- of some of these assets.

So the -- the -- the prime motivation is to lead to the recapitalization and the stronger capitalization of the -- of the industry.

That seems to imply that the institutions will be better able to raise capital after the TARP buys the dodgy assets - as opposed to suggesting the TARP will inject capital into the institutions.

And another question:

QUESTION: Mr. Secretary ... Is it conceivable ... that the Treasury might have to take far more far-reaching measures and, in particular, might that include the U.S. do some sort of recapitalization of its banking system?

PAULSON: Yes, I’m not going to speculate on all the things we -- we may have to do. I would simply say we have a broad range of authorities and tools in the -- in the TARP. And so we -- we’ve emphasized the purchase of the liquid assets, but we have a broad range of authorities. And I’m confident we have the authorities we need to -- to work with going forward here.

And that comment is ambiguous.

Here is a comment from Rep. Barney Frank (hat tip Brian):

In implementing the powers provided for in the Emergency Economic Stabilization Act of 2008, it is the intent of Congress that Treasury should use Troubled Asset Relief Program (TARP) resources to fund capital infusion and asset purchase approaches alone or in conjunction with each other to enable financial institutions to begin providing credit again, and to do so in ways that minimize the burden on taxpayers and have maximum economic recovery impact. Where the legislation speaks of ``assets'', that term is intended to include capital instruments of an institution such as common and preferred stock, subordinated and senior debt, and equity rights.
emphasis added

Maybe people are seeing what they want to see, but it'd be nice if the TARP was more oriented towards increasing capital.