The bailout has failed; the powers that be are panicking. All the bright boys seem to have thought that at least it could do no harm, and that if it failed to pass it could crush the markets. It is hard to imagine the markets in worse shape than they are right now, with no sign of improvement on the horizon and credit frozen. We have fired the first $700bn bullet into our own feet. Nationalizations are still the cheapest and most effective of the available options, Buiter says.
The Federal Reserve will begin paying interest on bank reserves (Fed Funds - 10bps on required, -75bps on excess) and has increased the size of its TAF auctions, to $600bn. Paying interest on deposits will allow the Fed to continue to expand the money supply without driving the Fed Funds rate to zero. The Fed says it is consulting with market participants "on ways to provide additional support for term unsecured funding markets." Market talk anticipates an emergency 50bp or 75bp rate cut — Fed fund futures are pricing in a 50bp cut by the Fed this month and markets may have been trading on the expectation of an emergency rate last Friday. Treasury says it may reintroduce the 3-year note. The FT suggests the Fed may begin offering unsecured loans to banks — essentially capturing the interbank lending market. Buiter argues that this may not be the worst solution -- central banks may need to begin acting as the central counterparties for all interbank lending.
Alistair Darling was considering a taxpayer-funded partial nationlization of the entire British banking sector Sunday. David Cameron wrote in Sunday's FT supporting "drastic capital measures" that would leave government with an equity stake in banks.
It is unclear whether Germany intends to follow in the footsteps of Ireland and Greece by pledging unilaterally to support bank deposits (a total of EUR568bn). Austria and Denmark have pledged to support their deposits. Paul Kedrosky rightly points out that universal deposit insurance was tried and failed during the Japanese crisis. There was no increase in lending, with the only result being foreign counterparties exploiting the regulatory arbitrage for free deposit insurance, resulting in an inflow of quick money.
UniCredit has announced plans to raise EUR6.6bn, which will raise its Tier 1 capital ratio to an alarmingly low 6.7%. Last week shares of UniCredit were suspended from trading in Milan. Perhaps unsurprisingly, Berlusconi said Sunday he would push for a concerted Eurozone bailout today — Eurozone leaders agreed not to pursue a coordinated bailout on Saturday. BNP Paribas will take control of 75% of Fortis's Belgian and Luxembourgeois operations; the Dutch government will nationalize Fortis's assets in the Netherlands. German banks and the government have agreed on a new EUR50bn bailout package for mortgage bank Hypo Real Estate after an initial EUR35bn package collapsed at the weekend.
Iceland said today it would guarantee all local bank deposits and has suspended trading in securities of its banking institutions. The krona fell 27% in dollar terms last week and another 23% against the Euro today. Iceland's PM is to present a rescue bill to Parliament.
Trading was halted today in Moscow after the Russian index plunged another 14%. The Washington Post runs a must-read article on underlying problems in the Russian economy. And creditors are starting to seize collateral from at least some Russian oligarchs.
South Korea said it would offer loans from its foreign reserves to banks unable to fund in foreign currencies. FT Alphaville looks at Korea's woes.
Wolfgang Münchau points out that the European banking crisis could turn into a crisis for European Monetary Union if one of the Eurozone countries hits its budgetary limits. The WSJ suggests the ECB may be forced to step in as a clearing bank.
Hank Paulson is expected to appoint Neel Kashkari, 35, a former Goldman banker and now a Treasury assistant secretary for international affairs, as tsar of the credit markets.
JPMorgan and Goldman Sachs are now both predicting the US has entered a recession.
A series of auctions today set values for the debt of Fannie and Freddie, on which the values of outstanding CDS will be calculated.
Citigroup is mad as hell after being gazumped by Wells Fargo for Wachovia - the legal situation is complex, unresolved, and fast moving, with the NYT reporting this morning that Citigroup is seeking up to $60bn of damages from Wells Fargo. Court cases have been filed in North Carolina and New York. The WSJ reports the Fed is pushing for Citigroup and Wells Fargo to compromise over Wachovia, perhaps carving its branches up between the two banks. What is increasingly clear is that the FDIC -- and its chairwoman Sheila Bair -- have been seriously outmaneuvered by the institutions it is supposed to regulate. The inevitable question is whether the other FDIC-brokered deals and bank closures -- particularly that of Washington Mutual -- were necessary, or whether the better-paid and more-experienced employees of the big money center banks are gaming the feds to pick up assets on the cheap.
The Sunday Times reports allegations JPMorgan froze $17bn of Lehman's assets, precipitating its bankruptcy. The unwind of Lehman's London business is so far ugly at best. Lehman lobbied the Fed this summer to be allowed to convert into a bank holding company (as Goldman and Morgan have since done), the FT reports, but was denied. Speculation is growing that the Fed bailed out JPMorgan to the tune of $138bn in the Lehman bankruptcy, by covering up asset transfers of worthless paper off JPM's books as a bridge loan. This scenario would explain both why JPM has been immune to the crisis and why Lehman was allowed to fail with disastrous consequences. Dick Fuld spent the day justifying himself before Congress.
Hewlett-Packard is cutting 25k jobs in an industry insulated from real-estate but directly linked to consumer and business purchasing. Ebay will cut 10% of its workforce in the face of poor earnings.
Countrywide has settled suits brought by 11 states for predatory mortgage practices and will set aside more than $8bn to modify loans.
The Telegraph says the cash position of some of Britain's largest companies is becoming an issue, with GBP50bn of short-term debt expiring between now and the end of the year. The Epicurean Dealmaker takes a cold look at the commercial paper markets and concludes things may not yet be as bad as the banks would like us to believe.
It has been a terrible quarter for hedge funds.
For the folks following along at home, the New York Fed summarizes its current lending operations.
The SEC's ban on short-selling of financial stocks will end at midnight on Wednesday.
The average vacancy at large US malls in Q3 rose to its highest level since 2001, and vacancies at strip malls hit a 14-year high.
Zimbabwe is falling apart as MDC and ZANU-PF continue to wrangle over the composition of the power-sharing cabinet; a hoped-for bailout from South Africa looks increasingly unlikely.
British government spokesmen have supported statements by their senior generals claiming there is no hope for victory in Afghanistan and negotiations with the Taliban are to be expected.
Pankaj Mishra asks in Sunday's Guardian whether there is any hope the next President of the US will be able to evade the trap of an escalating militarism.
Tata Motors has been forced to abandon the factory at which it had been planning to produce the Nano, the "one lakh (INR100k) car" which was to bring car ownership within the reach of the Indian masses, after protests by local farmers intensified. Mamata Banerjee's Trinamool Congress has been waging a campaign against the factory, which enjoys the support of West Bengal's ruling Communist Party of India (Marxist), for more than two years -- the factory has become a flashpoint of contention over the path of India's development.
North Korea's state news agency says Kim Jong Il has made a public appearance -- his first since August.
Tuvalu is asking Australia to accept its entire population as climate migrants if in a worst-case the island nation is submerged.
Adam Shatz at the LRB writes on "Obsession", the film on radical Islam distributed in many American newspapers in September.
It may be very difficult to solve the Somali piracy problem until there is stability on land.
NASA will have to rely on the Russian space program for human flight between 2010 and 2015, as the space shuttle program winds down. Another kick in the face for American pride.
China has already declared that the Copenhagen round of climate talks, which start next year to write a successor to the Kyoto Treaty, are likely to fail. Meanwhile, people are reporting that the likelihood of US climate regulation passing next year has significantly diminished thanks to the economic crisis.
New Jersey has approved one of the first large-scale offshore wind farms, a 350 MW deep offshore partnership between PG&E and Garden State Offshore Energy. We hope this marks a turning point in the US restriction of offshore wind for ridiculous aesthetic reasons, even as highly polluting offshore oil platforms are demanded three miles from shore.
Françoise Barré-Sinoussi and Luc Montagnier each won a quarter of the Nobel Prize in Medicine for their discovery of the HIV virus. Harald zur Hausen won half the prize for linking hpv to cervical cancer.
A Canadian computer scientist has exposed some of the massive internet surveillance in which the Chinese government engages.
The EU's Ecodesign Regulatory Committee (think Energy Star for the whole EU, but better) has come out with its first recommendations for design guidelines. It has proposed design guidelines for TV set-top boxes and fluorescent ballasts; the implementation of these guidelines could reduce energy consumption in the EU by ~45 TWH annually.