by Calculated Risk on 10/10/2008 04:31:00 PM

From Bloomberg: G-7 Meets on Crisis as Italy Splits Over `Weak' Draft

Finance ministers and central bankers from the Group of Seven nations met for crisis talks in Washington amid an unprecedented public split over what to say in their joint statement.

The draft communiqué under consideration is ``too weak'' and fails to reflect the gravity of the financial turmoil, Italian Finance Minister Giulio Tremonti told reporters in Washington before the talks began. ``We won't sign it.''

While Britain has pushed for a coordinated agreement to guarantee loans between banks, one official from a G-7 member said it was unlikely the G-7 would endorse their proposal. Two European officials said earlier that the group was considering saying that no systemically important bank would be allowed to fail, and laying out principles for all nations to follow.

The G-7 hopes to release a statement around 6 PM ET followed by comments from Secretary Paulson.

by Calculated Risk on 10/10/2008 02:28:00 PM

The TED spread (the difference between the LIBOR interest rate and the three month T-bill) has increased to a record 4.65 today. Completely off the recent charts! Here is the TED Spread from Bloomberg.

Here is a graph via Macroblog that shows a long term view of the TED spread (doesn't include the recent spike to 4.65).

There are a few earlier periods when the TED spread was higher than today (like during the '73-'75 recession).

But 4.65 is pretty close to the all time high.

And the following graph is the A2/P2 spread from the Fed's commercial paper report. The A2/P2 Spread hit 459 bp yesterday.

When the A2/P2 spread spiked to 160 last year that was considered shocking; now that spike looks minor.

Click on graph for larger image in new window.

This is the spread between high and low quality 30 day nonfinancial commercial paper.

These is still no relief in the credit markets.

by Calculated Risk on 10/10/2008 12:08:00 PM

From CNBC: Radical Measures May Be In The Wings

... Treasury Secretary Henry Paulson is prepared to take extraordinary steps through the extensive authority granted to him under emergency rescue legislation.

With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson is now expediting plans to inject capital into banks, CNBC has learned.

According to senior government officials, the plan is to offer a term sheet, offering capital injections to all banks. An announcement won't happen for several days.

by Calculated Risk on 10/10/2008 11:28:00 AM

From the WSJ: Germany Considers Plan to Recapitalize Its Banks

Germany is working on a plan to prop up its major banks that could include taking government stakes and measures to guarantee banks' access to liquidity ... No final decision had been taken on Friday, but Chancellor Angela Merkel's government could take a decision on the plan and announce it as early as this weekend ...

The German plan could resemble the U.K. government's move to recapitalize major banks by taking government stakes ...

by Calculated Risk on 10/10/2008 10:34:00 AM

Click on cartoon for larger image in new window.

Here is a grim take on the markets from from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

by Calculated Risk on 10/10/2008 09:34:00 AM

Markets are cliff diving.

Dow is was down below 8000. Update: Now up to 8400 (expect volatilty!)

The Bush news conference is scheduled for 10 AM 10:30 AM.

Here is the CNBC feed.

And a live feed from C-SPAN.

by Calculated Risk on 10/10/2008 09:01:00 AM

Former Fed Chairman Paul Volcker writes in the WSJ: We Have the Tools to Manage the Crisis Excerpts:

Today, the financial crisis has reached a critical point. .... For months, the real economy, apart from housing, had not been much affected by the developing crisis. Now, a full-scale recession appears unavoidable. ...

Those are facts.

They are the culmination of economic imbalances, a succession of financial bubbles and financial crises that have been building for years. It's no wonder that confidence in markets, banks, and financial management has been badly eroded. Without effective action, fear might take hold, threatening orderly recovery.

Fortunately, there is also good reason to believe that the means are now available to turn the tide. Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and to restore trust.

First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact.

More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary.
...
The inevitable recession can be moderated. The groundwork can be laid for reconstructing the financial system and the regulatory and supervisory arrangements from the bottom up. The extraordinary interventions by the government (and taxpayer) should be ended as soon as reasonably feasible.

That rebuilding will be the job of another day ...

There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs -- and financial crises -- will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.

Volcker has been warning about these problems for years, and he clearly believes we have the tools to "manage" the crisis. But do we have the leadership? The 2nd headline to his piece is: "Now we need the leadership to use them."

by Calculated Risk on 10/10/2008 06:04:00 AM

Mark Landler and Edmund Andrews write in the NY Times: Nations Weighing Global Approach as Chaos Spreads

The United States and Britain appear to be converging on a similar blueprint for stemming the financial chaos sweeping the world, one day before a crucial meeting of leaders begins in Washington that the White House hopes will result in a more coordinated response.

The British and American plans, though far from identical, have two common elements according to officials: injection of government money into banks in return for ownership stakes and guarantees of repayment for various types of loans.

Here is the proposal from Prime Minister Gordon Brown in The Times: We must lead the world to financial stability.

However according to the NY Times article, it sounds like the U.S. has only begun to consider these options:

One senior administration official argued that expecting an agreement on proposals like Mr. Brown’s would be “irrationally raising expectations.”
...
The White House confirmed that the Treasury Department was considering taking ownership positions in banks as part of its $700 billion rescue package. But officials said the idea was less developed than the plan to buy distressed assets from banks through “reverse auctions.”

Less developed than the Paulson plan? That plan was never clearly explained.

The WSJ suggests: U.S. Weighs Backing Bank Debt

The U.S. is weighing two dramatic steps to repair ailing financial markets: guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits.
...
Under the U.K.'s recently announced plan, which it is now pitching to the G-7 members, the British government would guarantee up to £250 billion ($432 billion) in bank debt maturing up to 36 months. The British concept to expand its proposal to other countries has a lot of support from Wall Street and is being pored over by U.S. officials, according to people familiar with the matter.

Professor Krugman calls this weekend a Moment of Truth:

[K]ey policy players have largely wasted the past four weeks. Now they’ve reached a moment of truth: They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression.
...
What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.

by Calculated Risk on 10/09/2008 08:57:00 PM

Just in good fun ... (hat tip NoVAOnlooker)

	See: Bailout Role Elevates U.S. Official
Hank Paulson ("Dr. Evil")	Neel Kashkari ("Mini-Me")

by Calculated Risk on 10/09/2008 07:36:00 PM

Before the G7 meets in Washington tomorrow, British Prime Minister Gordon Brown writes in The Times: We must lead the world to financial stability. Excerpts:

The stability and restructuring programme for Britain that we announced this week is the first to address at one and the same time the three essential components of a modern banking system - sufficient liquidity, funding and capital.

So the Bank of England has pledged to double the amount of liquidity it provides to the banks; we have guaranteed new lending between the banks so that we can get the banks lending to each other again; and at least £50 billion will be made available to recapitalise our banks.

We will take stakes in banks in exchange for a return and will guarantee interbank lending on commercial terms. And at the heart of these reforms are clear principles of transparency, integrity, responsibility, good housekeeping and co-operation across borders.

But because this is a global problem, it requires a global solution. Indeed this now moves to a global stage with a range of international meetings starting this week with the G7 and the IMF and, we propose, culminating in a leaders meeting in which we must lay down the principles and the new policies for restructuring our banking and financial system all around the globe.

... I believe through wider European co-operation and also co-ordination among the leading economies, there are four broad steps we must now all take to restore our international financial system.

First, every bank in every country must meet capital requirements that ensure confidence. Just as in the UK we have made at least £50 billion of new capital available, so other countries where banks have insufficient capital will need to take measures to address this. Only strong and solid banks will be able to serve the global economy.

Secondly, short-term liquidity is simply a means of keeping the system going. What really matters for the future is to open the money markets that have been closed for medium-term funding from the private sector. ...

Thirdly, we must have stronger international rules for transparency, disclosure and the highest standards of conduct. ...

And fourthly, national systems of supervision are simply inadequate to cope with the huge cross-continental flows of capital in this new, ever more interdependent world. ...