by Calculated Risk on 10/13/2008 11:30:00 AM

From the WSJ: Paulson Calls Meeting of Bank Chiefs

The 3 p.m. meeting is being called while most of the banking chiefs are in Washington for meetings of the World Bank and the International Monetary Fund. Invited to attend were banking executives including Ken Lewis, CEO of Bank of America, Jamie Dimon, CEO of J.P. Morgan Chase, Lloyd Blankfein, CEO of Goldman Sachs Group; John Mack, CEO of Morgan Stanley; and Vikram Pandit, CEO of Citigroup.

... one person familiar with the matter said Secretary Paulson is expected to discuss details of his new plan to take equity stakes in financial firms ...

Apparently Paulson is considering making equity investments in strong banks to keep them lending. This would be voluntary. From Interim Assistant Secretary for Financial Stability Neel Kashkari this morning:

Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.

by Calculated Risk on 10/13/2008 09:30:00 AM

Here are a few indicators I'm watching for progress on the credit crisis.

The yield on 3 month treasuries. (note: bond markets are closed for Columbus Day).


Click on graph for larger image in new window.

This graph shows the high, low, and the close for the three month treasury bill since the beginning of the year.

A good sign would be if the daily volatility subsides, and the yield moves up closer to the Fed funds rate, or about 1.25%.

The TED spread. The TED spread hit a recent high of 4.64 on Friday. This is far above the highs reached during the previous waves of the credit crisis.

Any significant decline would suggest progress, and a decline below 1.0 would indicate this wave of the crisis is over.

Edit: From Econbrowser:

One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate.

Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales.

The A2P2 spread.

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

During a recession, this spread usually increases because the risk of default for lower quality paper increases. However the recent values (over 400 bps) are far in excess of normal. If the credit crisis eases, I'd expect a significant decline in this spread.

Industry contacts. I'm tracking some financing deals there are being held up right now. If these deals complete that would be a good sign (I'll post something when this happens).

Added:

The spread between the 2-year interest rate swap and the 2-year Treasury (recommended by bond guy)


In the comments, bond guy writes:

The T-Bill rates will probably take time to settle down. This means that the TED spread will probably be volatile for awhile.

I'd argue that a better indicator will be the 2-year swap spread (spread between 2-year swap rate and 2-year Treasury). If that can come down to 50 bps or so (from over 150), that would mean that the markets would be discounting spread normalization over the coming years.

by Calculated Risk on 10/13/2008 09:09:00 AM

From Bloomberg: Princeton's Paul Krugman Wins Nobel Economics Prize

Congratulations!

by Calculated Risk on 10/13/2008 09:06:00 AM

From MarketWatch: Mitsubishi UFJ invests $9 billion in Morgan Stanley

Mitsubishi UFJ Financial closed on a $9 billion equity investment in New York-based Morgan Stanley, giving the Japanese bank a 21% ownership stake. The buyer acquired $7.8 billion of perpetual non-cumulative convertible preferred stock with a 10% dividend and a conversion price pegged at $25.25 a share.

by Calculated Risk on 10/13/2008 02:42:00 AM

UPDATE: From the NY Times: Britain Props Up Banks as Fed Leads Funding Effort

The Royal Bank of Scotland — once viewed as among the most solid of Britain’s Main Street institutions — announced it would seek around $34 billion to boost its capital as part of a bail-out devised by Prime Minister Brown and Mr. Darling and offered as a global template to resolve the crisis. The bank said the British government would buy preference shares worth around $8.5 billion and underwrite the rest. The deal could mean that the British government will own almost 60 percent of Royal Bank of Scotland along with more than 40 percent of HBOS and Lloyds TSB, which are negotiating a merger.

From MarketWatch: U.K. agrees cash injections for RBS, HBOS, Lloyds TSB

The U.K. Treasury said Monday that it's agreed to make capital investments in Royal Bank of Scotland (RBS) and, upon a sucessful merger, HBOS and Lloyds TSB totalling 37 billion pounds ($63 billion).... It's also requiring banks to maintain the availability of competitively-priced lending to homeowners and has the right to appoint new independent non-executive directors.

£20 is being invested in RBS. £17 in HBOS and Lloyds (the merger is essentially being forced at this point). It sounds like the U.K. will own 43% of Lloyds-HBOS. I haven't heard the percentage in RBS. 

by Calculated Risk on 10/13/2008 02:16:00 AM

From the Fed: Federal Reserve and other central banks announce further measures to provide broad access to liquidity and funding to financial institutions

In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.

The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures.

Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.

Federal Reserve Actions
To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.

These arrangements have been authorized through April 30, 2009.

The Fed never sleeps ...

by Calculated Risk on 10/13/2008 12:12:00 AM

Paul Krugman writes in the NY Times: Gordon Does Good. A few excerpts:

The natural thing to do ... is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization ... is the crisis solution advocated by many economists — and sources told The Times that it was also the solution privately favored by Ben Bernanke, the Federal Reserve chairman.

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path ...

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead ... And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As Krugman notes, many economists - like Krugman, Roubini, DeLong, and many others - were urging something similar to the Gordon Brown approach.

BTW, the UK announcement is expected very soon - around 7 AM London Time (2 AM ET, 11 PM PT).

by Calculated Risk on 10/12/2008 07:58:00 PM

From the WSJ: RBS CEO's Exit Is Likely As Part of U.K. Purchase.

On Sunday night, bankers and officials expected to work through the night again to put in place details of the plan they hoped to announce before the market opens Monday.
...
On Sunday night, a spokesman for the London Stock Exchange said the market would be open for trading as usual.

The UK announcement is expected around 7 AM London Time (2 AM ET, 11 PM PT). We are still waiting for Morgan Stanley too.

Here is the current London Time:


Bloomberg Futures.

Index Futures from Barchart.com (active futures have a time not a date)

CBOT mini-sized Dow

by Calculated Risk on 10/12/2008 05:44:00 PM

Andrew Sorkin reports in the NY Times: Mitsubishi and Morgan Stanley Renegotiating

Under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21 percent of Morgan Stanley ... But all of the investment would be through preferred shares, with a 10 percent annual dividend. Many of those shares would be convertible into common stock, but the Japanese bank was trying to set a conversion price far lower than originally proposed.

Treasury, however, is not planning to have the United States government take a direct stake in Morgan Stanley ... Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the United States were to decide to inject money into Morgan Stanley at a later time ... that such a move would not wipe out preferred shareholders.

Sorkin writes that an announcement is expected before the market opens on Monday.

Note: The final details of the UK bank recapitalization plan is expected at 7 AM London time.

by Calculated Risk on 10/12/2008 03:56:00 PM

UPDATE: From Reuters: Final statement from euro zone summit in Paris

From Bloomberg: European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under ...

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

This apparently applies to all countries using the euro. Update: A reader adds:

Just to avoid any misunderstandings: tonight's meeting of the Eurogroup has no rule-making powers. In essence, it is just a political coordination forum. It is up to each Eurozone country to act. The fact that they all agreed the statement does not necssarily mean they will all do this.