by Calculated Risk on 10/10/2008 06:57:00 PM

G-7 Finance Ministers and Central Bank Governors

Plan of Action

Washington— The G-7 agrees today that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth. We agree to:

1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF’s critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.

by Calculated Risk on 10/10/2008 06:49:00 PM

It's Friday. From the FDIC:

Main Street Bank, Northville, Michigan, was closed today by the Michigan Office of Financial and Insurance Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Main Street Bank, by Monroe Bank & Trust, Monroe, Michigan.
...
Main Street Bank had total assets of $98 million in total assets and $86 million in total deposits as of October 7, 2008.

Monroe Bank & Trust has agreed to pay a total premium of 1 percent for the failed bank's deposits. In addition, Monroe Bank & Trust will purchase approximately $16.9 million of Main Street's assets, and have a 90-day option to purchase approximately $1.1 million in premises and fixed assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to its Deposit Insurance Fund will be between $33 million and $39 million. Monroe Bank & Trusts' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the failed bank's franchise.

Main Street Bank is the first bank to be closed in Michigan since New Century Bank, Shelby Township, Michigan, on March 28, 2002. This year a total of fourteen FDIC-insured institutions have been closed.

And also:

Meridian Bank, Eldred, Illinois, was closed today by the Illinois Department of Financial Professional Regulation-Division of Banking, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Meridian Bank by National Bank, Hillsboro, Illinois.
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Meridian Bank had total assets of $ 39.18 million in total assets and $ 36.88 million in total deposits as of September 25, 2008. National Bank will purchase approximately $7.55 million of Meridian's assets, and did not pay the FDIC a premium for the right to assume all of the failed bank's deposits. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost to its Deposit Insurance Fund will be between $13 million and $14.5 million. National Banks' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives.

Meridian Bank is the first bank to be closed in Illinois since Universal FSB, Chicago, Illinois on June 27, 2002. This year a total of fifteen FDIC-insured institutions have been closed.

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.