The cauldron continues to boil in Washington, as the pricing of mortgage securities becomes a major issue in the bailout plan. Bernanke as much as admitted that there would be no true reverse auction of securities to be bought by the TARP when he brought forth caveats about price floors and fair value. But a reverse auction is not suitable for this situation, with or without a price floor. The opportunities for collusion by participants abound; the auction would greatly favor Morgan Stanley and Goldman Sachs (which seem to be relatively healthy) over every other bank; and if a genuinely fair price were achieved then the price would be sufficiently low that no "confidence" would be instilled in the market at all. Adding a price floor merely ensures this will be a taxpayer giveaway. Of course, Bernanke seems to want to do a reverse-reverse auction in which the Treasury sets the price.
Bailout talk hasn't unfrozen the money markets. Calculated Risk reports that the TED spread is again above 3.0%, some six times its normal level of 0.5%, indicating that the new Fed lending facilities are inducing substitution effects: rather than promoting interbank lending, the facilities are decreasing it, as banks confident the Fed will swap them Treasuries hoard their capital. Overnight Libor is also up significantly, though below last week's crisis levels, and there are renewed reports of T-bills trading with negative or zero yield. Possibly worse, Caterpillar came to the market yesterday with a 5-year note at Treasury + 320bp. FT Alphaville looks at the collapse in the commercial paper market.
The Fed has extended another $30bn of dollar swap lines to the Australian, Swedish, Danish, and Norwegian central banks.
The Big Picture points out how expensive Buffett's $5bn was for Goldman. (How, the question goes, can Treasury be looking to strike a worse deal with the worst banks than Buffett just struck with the best?) Sumitomo Mitsui is said to be considering its options after Buffett beat them to the punch. Meanwhile, Goldman is raising $5bn in a common stock issue and looking at failed IndyMac's assets as a possible first foray into retail banking.
JC Flowers -- the individual, not the investment company -- has bought a small bank ($14mn assets) in Missouri personally. Anyone's guess, but he may intend to use it as a platform for further acquisitions.
Frederic Mishkin says in the FT that inflation targeting should not be abandoned.
The Kremlin has authorized the state-owned Development Bank to bail out the 20th largest bank in Russia, Syvaz Bank. Syvaz failed to meet margin calls late last week.
Angry factory workers beat an executive in India to death yesterday. Maybe Dick Fuld's recent secrecy is all that saved him from a horde of Greenwich bond traders.
August US existing home sales (seasonally adjusted) were down 2.2% MoM in August, but were down 10.7% YoY; housing inventory decreased slightly to 10.4 months. Lowe's said it would cut down on new store openings next year. Chrysler reveals it has lost $400mn so far this year, with sales slipping 24% in the first 8 months of the year.
President Bush's speech to the UN General Assembly included unexpected digs at Russia over the Ossetian war. Mahmoud Ahmadinejad is blaming Zionists (for what, exactly, it's hard to tell).
The White House has no plans to declassify the new National Intelligence Estimate on Afghanistan that reportedly paints a "grim" picture of the situation in that country.
China launches its third manned spaceship today, Shenzhou VII. Zhai Zhigang is set to be the first Chinese national to walk in space.
At least a hundred are dead in Mogadishu after renewed fighting between insurgents and African Union peacekeepers.
The Independent published today the first evidence that methane stored in the arctic permafrost is beginning to bubble up. This is the most important of the doomsday scenarios for climate change -- if the permafrost begins to melt, it is possible that enough methane would be released to trigger a positive feedback loop, leading to more arctic warming and in turn to more permafrost melting and the release of more methane. The possible contribution of such a loop -- which could be triggered by anthropogenic warming, and which may have occurred in known paleoclimatological history -- to global warming is an order of magnitude greater than current human contributions to warming. We covered a paper last week that showed evidence that the permafrost may be more difficult to melt than people might think.
The Senate passed the big renewable energy bill today 93-2. The bill extends the ITC (the tax credit for solar installation) for eight years, and it extends the PTC (the tax credit for renewable energy production) for one year. It also extends the renewable R&D credit. The House passed a similar bill last week, so investment in renewables should not drop beyond what the economic climate indicates. However, Senate Democrats appear to have let the moratorium on new offshore drilling lapse in advance of going into recess, under pressure from President Bush.