Bank Frauds and Glass-Steagall -- Déjà Vu

From the FDIC web site. (hat tip to Obseedian of MarketTickerForum. Nice catch thanks. The whole section is worth reading.)

"National City Company repackages bad Latin American loans from its affiliated bank and sells them to unknowing investors as new securities.

This is one of the deals that initiate the Glass-Steagall Act of 1933."

FDIC: Banks in the Roaring 20's



By way of reminder, the banks will be trotting the VISA IPO out the door tonight and tomorrow.

VISA IPO Gets Priced Tomorrow

Bernanke's Odyssey

We are evenly split on whether the Fed will cut 50 or 75 basis points this afternoon. 100 or more basis points would reflate equity markets but put the dollar in freefall unless the Fed also wraps restrictive language around it signalling a firm pause.

We return to our analogy of Scylla and Charybdis. The Fed's task is to navigate between a falling dollar and broken bond on one hand, and the real economy and the equity markets on the other. Its a difficult task, made even more difficult as we approach what the Fed likes to call 'the zero bound.' We call to mind Chairman Bernanke's game plan as discussed in his academic writings:
"Bernanke and Reinhart (2004) discuss three alternative, though potentially complementary, strategies when monetary policymakers are confronted with a short-term nominal interest rate that is close to zero. As discussed in the introduction, these alternatives involve:

(1) shaping the expectations of the public about future settings of the policy rate,
(2) increasing the size of the central bank’s balance sheet beyond the level needed to set the short-term policy rate at zero (“quantitative easing”); and
(3) shifting the composition of the central bank’s balance sheet in order to affect the relative supplies of securities held by the public."

It is deceptive to think that the Fed will wait until US short term rates are at zero to implement these strategic options. Indeed, they have been trying to shape expectations for some time through both talk and selective price manipulation of certain financial assets, as Mr. Bernanke discloses in his paper using supply and demand dynamics of select financial instruments. Shifting the composition of the Fed's balance sheet is well underway with the non-recourse additions of junk mortgage debt to the Fed assets once pristine with Treasuries and the better agencies.

The next shoe to drop will be the methods by which the Fed "increases the size of their balance sheet" quickly enough to achieve a quantitative easing. Several commentators are calculating the Fed held assets as they approach zero as the Fed extends its assets to the banks and exchanges them in a variety of swaps.

We suggest it is probably incorrect to assume that when the Fed expend the remaining three or four hundred billions of existing Treasury holdings that they will say 'game over' and call it a day. That when we leave the trodden path of monetary history and the US attempts to break the final bonds of a purely fiat currency.

IMF External Relations Department
Morning Press
Tuesday, March 18, 2008

Pressure on Fed to slash interest rates

The Federal Reserve faces pressure to cut interest rates by as much as a full percentage point or more at its scheduled policy meeting today, the FT reports. In early trading yesterday, options prices indicated roughly even odds of a 75basis-point cut or a 100-basis-point cut - with some traders betting on an even bigger 125-basis-point reduction from the current rate of 3%. This puts the U.S. central bank in a difficult position. Before the latest deterioration in financial markets and the crisis at Bear Stearns, policymakers were signaling their reluctance to cut rates by more than 50 basis points at this meeting.

They wanted to indicate that they were still committed to managing inflation at a time when the dollar has been plummeting, commodity prices soaring and market expectations of inflation and inflation risk mounting. Fed policymakers are increasingly doubtful that the risks facing the financial system and the economy can be dealt with through orthodox monetary policy alone. So far interest rate cuts have been largely offset by the expansion in credit spreads. While some on the committee believe this calls for still more aggressive rate reductions, others are concerned that if the central bank cuts rates too aggressively in the face of inflation risk, the bond market could rebel, pushing long-term interest rates up.

But developments in the economy and above all the financial markets in recent days are likely to push policymakers to consider more than a 50-basis-point cut. Above all, financial markets are in a state of extreme dysfunction, which extends to the core of the housing finance system: mortgages guaranteed by Fannie Mae and Freddie Mac.

For years, policymakers have fretted about the global imbalances embodied in the U.S. trade deficit and associated surpluses in China, Japan and oil-exporting countries, the FT also reported. The fear was that if these were to unwind rapidly, with confidence evaporating in the U.S. economy and the dollar, the outcome would be grim. In 2006, the IMF said a disorderly reduction in the U.S. trade deficit would involve "a more rapid fall of the U.S. dollar, volatile conditions in financial markets, rising protectionist pressures, and a significant hit to global output". Dominique Strauss-Kahn, the IMF managing director, yesterday made it clear that some of those fears are materializing.

"For a long time the dollar was in a situation where its downward movement was predictable. We are now in a situation that is more stretched," he said. "It's a problem for economic growth. We clearly face a situation in which the risks to economic growth are more and more serious."

The prospect of full-blown official foreign exchange intervention was played down yesterday by the head of the IMF as the euro's surge to another record high created a fresh headache for the ECB, the FT reported. "It doesn't appear that in this situation central banks need to intervene," said Dominique Strauss-Kahn, IMF managing director.

As jittery investors digested Washington's dramatic steps Sunday to broker a bailout of Bear Stearns Cos. and offer emergency credit to Wall Street firms, the possible outlines of a broader response to the U.S. financial crisis began taking shape, The Wall Street Journal reported today. The result is likely to be a heavier hand of government in the form of corporate bailouts, fiscal incentives and regulation. In the wake of the Bear Stearns deal, fears persisted that the credit-market woes might damage the broader U.S. economy. Overseas markets sold off sharply prior to the start of the U.S. trading session. The dollar also faltered badly, at one point hitting its lowest level against the yen since August 1995. In the financial sector, National City plummeted 43% on reports it was having a hard time finding a buyer. Lehman Brothers dropped 19%.

Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street's biggest institutions from their far-reaching mistakes, The New York Times reported today. Over the next few months, the central bank will lend hundreds of billions of dollars to banks and investment firms that financed a mountain of mortgages now headed toward default. No one knows how many financial institutions will be looking for money, or how much they will seek. No one knows how much in hard-to-value securities the central bank, in return, will have to hold as collateral."

The Fed's decision this afternoon will not give us a clear answer to which way we are heading if the Fed does its job well in striking another balance in the moving equilibrium between economic implosion and currency devaluation. But it will help us to chart the progress as Bernanke navigates the current danger, ironically of the Fed's own creation. Is there a real end in sight? Or is the Fed merely prolonging the problem through financial turmoil and manipulation as the US Dollar empire declines?

"Beauty is but a flower,
That wrinkles will devour.
Brightness falls from the air.
Queens have died, young and fair;
Dust hath closed Helen's eye.
We are sick, and must die.
Lord have mercy on us."

Greece fell. Persia fell. Egypt fell. Rome fell. And life went on. We can only conduct ourselves with honor and grace, as best we can, as this page of history slowly and raggedly turns.

"The world will know that free men stood against tyranny, that few stood against many, and that before this battle is over, even a god-king can bleed."

The Visa IPO Gets Priced Tomorrow

The much awaited VISA IPO gets out the door tomorrow according to Bloomberg.

Tradition suggests that the equity markets will be calmed with oily trades on troubled financial waters until the players can get it out the door. There might be a respite for stocks. It might not last. Federal Reserve meets tomorrow. They will be sure to do their part.

When the commentators and wide-eyed financial groupies wax poetic about the Fed's heroic actions in 'saving the markets' today, we might wish to keep in mind that in true Wall Street tradition they might just be angling for another quick customer face-ripping before heading out of the exits.

Bank owners counting on big payday from Visa IPO
Sun Mar 16, 2008 11:41am EDT
By Lilla Zuill

NEW YORK, March 16 (Reuters) - Turmoil has chilled the U.S. market for initial public offerings but it is unlikely to stop Visa Inc's attempt to burn its name into the IPO record books when it comes to market this week.

U.S. stock markets nose-dived on Friday with the S&P 500 index .SPX losing more than 2 percent, dragged down by a sudden cash crunch at Bear Stearns Cos (BSC.N: Quote, Profile, Research) that forced the Federal Reserve to intercede.

Against that backdrop, Visa is steaming ahead to list its shares on the New York Stock Exchange under the symbol "V". The listing is expected on Wednesday.

Visa's banking owners -- who stand to reap in the region of $10.2 billion in the offering -- may be pushing for the IPO's launch, analysts said.

"It is all the more critical that this happens now," said Francis Gaskins, president of research firm IPOdesktop.com.

Under Visa's plans, 406 million class A common shares will be sold to the public for between $37 and $42 apiece, raising between $15 billion and $17 billion, or more if demand is there.

It is seen as largest-ever U.S. IPO, and second worldwide to Industrial & Commercial Bank of China Ltd (601398.SS: Quote, Profile, Research), which raised $22 billion in 2006, according to Reuters Data.

Hopes are high for Visa's IPO with it following a more than fourfold jump in shares for smaller rival MasterCard Inc's (MA) 2006 IPO, which raised $2.4 billion.

"(Plans for Visa's deal) started long before anyone heard the words 'subprime crisis' but now all those banks could use a big payday," said David Robertson, publisher of the Nilson Report, a semimonthly credit-card industry trade journal.

The rich payday from Visa's IPO could prove timely for bank owners, with mounting credit losses plaguing many lenders. JP Morgan Chase & Co, which has not been as badly hit by the credit crisis as some Wall Street peers stands to be $1 billion richer from the IPO.

A BLESSING?

The offering could prove a blessing for Bank of America Corp, which could see proceeds of up to $600 million, and up to $260 million for Citigroup, both of which have recorded large write-downs as a result of the subprime mortgage and credit crisis. (Oh yes, we are truly blessed this Holy Week, aren't we? May God be merciful. - Jesse)

Underwriters, led by JP Morgan and Goldman Sachs also could gain hefty fees from the deal, which could help make up for a 55 percent drop in IPO activity versus the same time last year, according to Renaissance Capital's IPOhome.com.

The Visa deal is expected to generate fees of $500 million, or more if well received.

"Unless there is bank failure after bank failure in the next few days I would expect Visa to come," said Scott Sweet, managing director of IPOboutique.com....