Speculation Nation Part 2

Our national priorities favor financial engineering, financial speculation, consumption on credit.

They penalize manufacturing, savings, and the median wage of labor.

It could not be any clearer.


Financial Times
Hedge funds gain access to $200bn Fed aid
By Krishna Guha in Washington
December 20 2008 05:01

Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

The asset-backed securities to be funded under the programme are pools of credit card receivables, automobile loans and student loans.

The idea is to increase the supply of these loans and reduce borrowing rates by ensuring that the companies that make the loans can sell them on to investors who have guaranteed access to low-cost funding from the Fed.

The TALF is a key plank of the unorthodox strategy set out by the Fed last week as it cut interest rates virtually to zero. Washington insiders expect the programme will be dramatically expanded next year with further capital support from Treasury once the Obama administration takes office.

A senior official in the outgoing Bush administration told the Financial Times it could also be broadened to include new commercial and residential mortgage-backed securities.

The Fed thinks risk premiums or “spreads” for consumer loans are much higher than would be justified by likely default rates, even assuming a nasty recession.

It attributes this to a lack of buying interest in the secondary market where the loans are sold on to investors. By making loans to these investors on attractive terms it aims to increase market liquidity.

Making the scheme open to all US companies is a radical departure for the Fed, which normally supports financial market liquidity indirectly by ensuring banks have adequate liquidity to make loans to other investors.

However, the liquidity the Fed is providing to banks is not flowing through to financial markets, because banks are balance-sheet constrained and risk-averse. So it is channelling funds directly to investors.

The scheme is not designed specifically for hedge funds and a wide range of financial institutions are likely to participate.

Nonetheless, Fed officials hope that hedge funds will be among those investors that take advantage of the low-cost finance to drive down spreads.

The loans will be secured only against the securities and not the borrower. However, the Fed will lend slightly less than the value of the securities pledged as collateral. The Treasury has committed $20bn to cover potential losses.

Since the credit crisis erupted, hedge funds have complained that they cannot get the leverage they need to arbitrage away excessive spreads and meet high hurdle rates of return.

“Demand is there for leverage but not supply,” said Sylvan Chackman, head of global equity financing at Merrill Lynch.

In effect, the Fed will now take on the role of prime broker – the lead bank that lends to a hedge fund – for specific assets.

Japan Government to Buy 20 Trillion Yen in Stock to Support Their Markets

You have to wonder why they just don't give money directly to their people, and allow them to use their discretion to invest and consume, rather than use the money to prop up a zombie market at the direction of a central planning bureaucracy.

It probably speaks volumes about their priorities in valuing the keiretsu and its crypto-medieval organization over the individual. The artificial composition of their economy is remarkable, and understood by few economists in the West with the cultural bias of their models.

You have to wonder if there will be any auto stocks in that share festival.

Japan plans to buy $227 billion in shares to boost market
By Michael Kitchen
8:11 a.m. EST Dec. 18, 2008

NEW YORK (MarketWatch) -- Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported.

Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported.

The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying. The Liberal Democratic Party had intially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said.

Black Swan Dive: Life On the Tails

The worst case scenario is if the Dollar, Bond, and Equities start going down together as the world repudiates the US Dollar Reserve Currency and Credit Bubble.

This is not a probable scenario.

The last time it happened was in 1933 in the trough of the Great Depression.

But we may have the opportunity to see something as once-in-a-lifetime and memorable as John Law's Banque Générale and the Mississipi Bubble.

Let's hope the Federal Reserve can reach deeper in its pockets for a better class of tricks than just front running the dollar and the bonds until they fall over.

Certainly anything is possible, but it does appear as though the US Long Bond is hitting a 'high note' of improbable valuation unless the world accepts a single currency dollar regime.