Five Things You Need to Know: Moral Hazard; The Myth of the Deliberate Central Banker; Credit Crunch Continues; Countrywide Shares Gain After Company Finds Quarter Under Desk; Return of the Slacker
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Moral Hazard
The Bank of England criticized other central banks yesterday for injecting cash into the financial system to help stabilize credit markets, saying that such a policy amounted to a bailout of investors who made bad decisions.
- Central banks worldwide injected nearly $400 bln in credit to banks in August alone, an unprecedented amount made all the more unusual by the fact they accepted extraordinarily risky collateral for the credit that was offered.
- By contrast, the Bank of England "only" injected $8.9 bln USD into the system.
- "The provision of large liquidity facilities penalizes those financial institutions that sat out the dance, encourages herd behavior and increases the intensity of future crises," Governor of the Bank of England Mervyn King wrote.
- "That encourages excessive risk-taking and sows the seeds of a future crisis," he added.
- This notion of "penalizing financial institutions that sat out the dance" leads us to today's Number Two...
2. The Myth of the Deliberate Central Banker
A headline we came across on Bloomberg this morning signals that less than two years into his term as Federal Reserve Chairman, Ben Bernanke's image is already being burnished by the press: Bernanke Spurns Greenspan Quick Fix, Seeking Data, Deliberation
- Ben Bernanke: The Deliberate Central Banker. If only it were true.
- While the myth-making begins in earnest, all one needs to do to discern the underlying reality is look at the evidence.
- The myth is that the Bernanke Fed has exercised "deliberation" and been "slow to respond" to a spreading credit crisis.
- The reality is that the Bernanke Fed has exercised virtually all of the tools a central bank has at its disposal to inject credit into the system.
- The Bernanke Fed has already cut the discount rate 50 basis points to reduce the penalty for direct borrowing by banks.
- As well, the "deliberate" Bernanke Fed is already accepting some of the riskiest assets around as collateral for the credit being offered.
- Moreover, Since August 9 the effective Fed Funds rate has been at the Fed target rate of 5.25% for a total of three of the past 24 days.
- What is there to deliberate?
- The "Deliberate" Bernanke Fed will meet next week, lower the Fed Funds target to 5% to match the effective Fed Funds rate, probably lower the Discount rate another 25 basis points to keep the "penalty" inline with the Fed Funds rate, and continue injecting credit in return for accepting risky assets no one else will touch as collateral.
- The difference between the Bernanke Fed and the Greenspan Fed is about like the difference between David Copperfield and David Blaine.
- The message is the same: it's magic!
- And the lesson for markets? Don't bet small.
- The only folks who lose under the Greenspan and Bernanke Fed are those who didn't use enough leverage to bring down the system.
- Bet small, you're on your own.
- Meanwhile, as the Bank of England's King noted, the seeds of the next financial crisis are already being sown; Bernanke's task is to avoid being the last Fed chairman to reap the harvest.
3. Meanwhile, the Credit Crunch Continues
Kohlberg Kravis Roberts & Co. will probably delay the sale of loans to finance the $26 billion takeover of First Data Corp. (FDC) until next week after failing to agree on terms with bankers, according to Bloomberg.
- At issue is pricing and how much of the debt lenders will try to sell, Bloomberg reported citing people close to the deal.
- What does that mean?
- It means KKR is finding that the group of banks led by Credit Suisse Group are balking at the previously agreed to terms because market conditions (read: illiquidity and fear) have changed.
- Why should FDC suddenly be a riskier bet now than, say a month ago?
- Because, as we noted yesterday, there is no longer any "reality" to the pricing of many credit instruments, even "quality" ones.
- Why wait until next week?
- Because KKR and Credit Suisse both know the Fed will take some action at their meeting to lower rates, and both are counting on that Fed action to increase market confidence.
4. Countrywide Shares Gain After Company Finds Quarter Under Desk
Countrywide Financial (CFC) is trading up nearly 7% this morning after the company said it has $12 bln in borrowing capacity through new and existing credit lines.
- Just last month CFC borrowed $11.5 bln from bank credit lines and accelerated a plan to fund mortgages through its thrift unit, Bloomberg reported.
- Now the company has arranged to access $12 bln more in borrowing capacity through new or existing credit facilities.
- "The company expects that it will be a long-term beneficiary of the current conditions and corrections in the mortgage industry,'' Countrywide President David Sambol said in a statement.
- Meanwhile, not long-term beneficiaries of the current conditions and corrections in the mortgage industry are the 12,000 employees the company said last week it would lay off.
5. Return of the Slacker
Eric Weiner in an article published in Tuesday's LA Times (Use time wisely -- by slacking off) writes, "Attitudes toward work differ not only across time but also place. Corinne Maier's appropriately slim volume, "Bonjour Laziness: Why Hard Work Doesn't Pay," advocated that workers resort to "active disengagement" at the office. It was a bestseller in France but didn't resonate on these shores."
- Yes, when it was published a year ago, Maier's book advocating laziness didn't resonate on these shores.
- But that is already changing.
- Weiner writes in the Times:
"In his essay, "In Praise of Idleness," British philosopher Bertrand Russell proposed reducing the workday to four hours, convinced that "the road to happiness and prosperity lies in an organized diminution of work." I agree. So be creative, be happy and waste some more time. Read this article again and again. Try reading it backward. E-mail it to co-workers. Translate it into Mandarin, then back into English. Then grab a coffee and enjoy some down time."
- What is the connection with financial markets?
- Think back for a moment to the Greenspan Productivity Miracle.
- Well, the former Fed Chairman was certainly right about that.
- The U.N.'s International Labor Organization recently issued a report that found that the U.S. leads the world in worker productivity -- and by a wide margin, Weiner notes.
- So why would it change?
- Productivity, like most "financial virtues," is the products of positive social mood trends.
- As social mood transitions to negative, we can expect to see less and less "virtue" in hard work.
- Think about it: real wages are virtually stagnant, so it's not as if people have experienced real reward for their work.
- What has been experienced is an unconscious and shared herding impulse trending upward; a shared optimistic mood finding "joy" and "happiness" in work and denigrating the sole pursuit of leisure, idleness.
- If social mood has, in fact, peaked, we can expect to see a different attitude toward work and productivity emerge.
- Note that Weiner's article doesn't simply value leisure - it values "slacking off."
- The phrase itself carries negative connotations:
Slacking - loosening, becoming less tight, less taut
Off - disengaging, dropping, deflating
- These are not accidental connotations.
- Within a positive social mood regime this might instead be called "pursuit of leisure."
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