Moving a bit too far in Kynesian model that 'the economy' can be fine-tuned like tuning a 'violin' by manipulating the monitary policy, the U.S federal reserve , today annonced a near zero interest rate policy.
May be you might be wondering, whether the U.S has adopted the Islamic model of Sharia law ( interest rates being unethical). As per the U.S Fed, you should be a 'real fool' to save. Spend, Spend and Spend, the U.S is planning to 'spend' its way out of recession.
The interest rates are already near zero, i.e for overnight interbank rate it was only announced today. Even before today's announcement, the 3 month treasury yield has beeing trading with near zero for the past 2 weeks. It closed at zero in 3 out of the past 5 days.
How low can the interest rates go? If the ec0nomy does not recover before the next meeting, will the U.S fed announce negative interest rates?
You might wonder how can there be negative interest rate. here is the explanation: Under the negative interest rate, you need to pay the bank to deposit your money the bank. If you are lucky you will get your principal back. On your bank deposit, the bank will add its own share and pay the borrower. If the borrower wants $100 loan, the bank will pay $105. If at all he wants to repay it, the borrower needs to pay only $100.
All this loans will securatised and branded as 'highly sophisticated instrments' and sold around the words 'Debit default swaps' (like CDS) and sold around the world. There are enough number of idiots the world who will buy these DDS instuments.
If the borrower defaults then the U.S Treasury will buy those 'Toxic Assets' with 'Tax payers money'. I mean the money collected through taxation in foreign countries and invested in U.S Tresury notes.
Wow. What a special form of 'Capitalism'?
So, don't worry, if the U.S Economy does not recover before the next fed meeting, the fed exactly knows what to do?
Tuesday, December 16, 2008
Saturday, September 20, 2008
HBOS acquried by Llyods TSB
It's natural that the people of Scotland are upset that the 'oldest bank' in Scotland is facing liquidation because 'some folks' failed to pay their mortgages in U.S. 'Bank of Scotland' is the first bank in Europe issue paper currency successfully. It is one the 3 banks in Scotland to print their own notes. May be the new entity will stop this practice.
There were some people who were upset that the new entity (to be called 'Llyods Halifax' did not have word 'Scotland' in the name. Personally i feel, if the name has to reflect all the past aqcuitions it would be 'Llyods TSB Halifax Bank of Scotland', which is too big to be printed on a cheque book. :-)
There were some people who were upset that the new entity (to be called 'Llyods Halifax' did not have word 'Scotland' in the name. Personally i feel, if the name has to reflect all the past aqcuitions it would be 'Llyods TSB Halifax Bank of Scotland', which is too big to be printed on a cheque book. :-)
Is Capitalism at crossroads?
The past week has been a roller coaster ride in the capital markets.
The week started with the 'surprise' announcement in Bollywood style from Bank of America that it had got married to Merrill Lynch urgently over the weekend. The global markets were mourning for the orbituary news of Lehman Brothers. Then there was this debate whether AIG will make it to the prestigious 'Hall of Fame' of 'Too Big to Fail' following 'Freddie Mac' and 'Fannie Mae'. There were detailed coverage on AIG. I was under the impression that AIG stands for American Insurance Group, then I came to know that its 'American International Group'. I never understood the common link between personal insurance, leasing aircrafts and insuring suprime mortgages ( these are some of the AIGs businesses). I have heard 'forward integration' and 'backward integration', i think this a new type called 'no-where integration'. The only thing that I was able understand was that AIG currently has a nasty balance sheet and it did not have enough cash to run the company.
A rating agency (i guess its S&P) was pleading to AIG to raise some cash with in few days. If its some other company they will downgrade it straight away. They can't do it to AIG, since its a big American company and potential candidate for 'too big to fail' royal league. The western financial media was not able to digest even this 'royal' treatment of AIG, they were crying foul that the rating agencies are creating liqudation problems 'big' companies.
The there was the usual blaming of short sellers and 'Cruel' Hedge funds driving 'down the value' of these 'big' companies. Lehman Brothers is a 158 years old company it went public only in 1994. Stock price can make borrowing 'expensive' for the company it can not force a company bankcrupt. Stock price is not the cash flow for a company, borrowings are not cash flow for the company, only revenues are the real cash flow of the company. These troubled financial institutions invested its way to bankruptsy. I think people are forgetting (or perhaps hiding) the very fact the these companies extremely over leveraged ( read mis-managed) that it did not have enough cash to run the company.
Under these troubled times, arranged marriages are becoming more and common in the West (at least in financial markets). Bernake, Paulson & their team (read Fed, Treasury & team) work really hard over each weekend trying to figure-out 'whom' they can get married to 'whom'. 'Purohith' Paulson arranged for the marriage of 'JP Morgan' and 'Bear Stearns' few weeks ago. Perhaps this inspired 'Broker' Brown (in U.K) to arrange for the alliance of 'Loyds TSB' and 'Halifax Bank of Scotland' (HBOS). The way these governments (U.S & U.K) and its agencies are so desparate for these arrangements, it looks as if these are 'Forced' marriages.
Apart from looking for marriage proposals, thursday overnight Fed and ECB 'pumped' billons of currency into the corresponding money markets to ease liquidity issues. The SEC and FSA have come up with the 'Fantastic' idea of stopping shorting of financial stocks. Personally I feel, this decision skews the market in one-direction i.e. only long. As the markets move from 'excess' fear to excess 'greed', will they consider banning long (i.e buying of stocks)?. This argument might sound rediculous to some, but i pesonally feel banning shorting is equally rediculous. Especially in so-called 'matured markets'.
Before the end of the week AIG again made headlines by managing to get some oxygen in 'Trauma Care'.
As I am writing this, In U.S a 'Fabulous' $700 billion bail-out plan is being announced. Maye be Fed would be funding using revenue from the Treasury notes. About 40% of U.S treasury notes are held by foreigners. India's current forex reserve is about $250 billion, China has about a $trillion in reserve. I dont know much of is already made its way to U.S treasuries. But it is certainly a risky investment. As recommended by the 'Tarapore Commission', to safegaurd itself, India should consider maintaining its reserve as commodities rather than foreign currencies. If not 'what happened to investment banks' today can happen to Indian forex investments in treasuries.
We never know. May be every thing will be fine after 1 or 2 years or may be Capitalism is at the crossroads? God Bless America.
The week started with the 'surprise' announcement in Bollywood style from Bank of America that it had got married to Merrill Lynch urgently over the weekend. The global markets were mourning for the orbituary news of Lehman Brothers. Then there was this debate whether AIG will make it to the prestigious 'Hall of Fame' of 'Too Big to Fail' following 'Freddie Mac' and 'Fannie Mae'. There were detailed coverage on AIG. I was under the impression that AIG stands for American Insurance Group, then I came to know that its 'American International Group'. I never understood the common link between personal insurance, leasing aircrafts and insuring suprime mortgages ( these are some of the AIGs businesses). I have heard 'forward integration' and 'backward integration', i think this a new type called 'no-where integration'. The only thing that I was able understand was that AIG currently has a nasty balance sheet and it did not have enough cash to run the company.
A rating agency (i guess its S&P) was pleading to AIG to raise some cash with in few days. If its some other company they will downgrade it straight away. They can't do it to AIG, since its a big American company and potential candidate for 'too big to fail' royal league. The western financial media was not able to digest even this 'royal' treatment of AIG, they were crying foul that the rating agencies are creating liqudation problems 'big' companies.
The there was the usual blaming of short sellers and 'Cruel' Hedge funds driving 'down the value' of these 'big' companies. Lehman Brothers is a 158 years old company it went public only in 1994. Stock price can make borrowing 'expensive' for the company it can not force a company bankcrupt. Stock price is not the cash flow for a company, borrowings are not cash flow for the company, only revenues are the real cash flow of the company. These troubled financial institutions invested its way to bankruptsy. I think people are forgetting (or perhaps hiding) the very fact the these companies extremely over leveraged ( read mis-managed) that it did not have enough cash to run the company.
Under these troubled times, arranged marriages are becoming more and common in the West (at least in financial markets). Bernake, Paulson & their team (read Fed, Treasury & team) work really hard over each weekend trying to figure-out 'whom' they can get married to 'whom'. 'Purohith' Paulson arranged for the marriage of 'JP Morgan' and 'Bear Stearns' few weeks ago. Perhaps this inspired 'Broker' Brown (in U.K) to arrange for the alliance of 'Loyds TSB' and 'Halifax Bank of Scotland' (HBOS). The way these governments (U.S & U.K) and its agencies are so desparate for these arrangements, it looks as if these are 'Forced' marriages.
Apart from looking for marriage proposals, thursday overnight Fed and ECB 'pumped' billons of currency into the corresponding money markets to ease liquidity issues. The SEC and FSA have come up with the 'Fantastic' idea of stopping shorting of financial stocks. Personally I feel, this decision skews the market in one-direction i.e. only long. As the markets move from 'excess' fear to excess 'greed', will they consider banning long (i.e buying of stocks)?. This argument might sound rediculous to some, but i pesonally feel banning shorting is equally rediculous. Especially in so-called 'matured markets'.
Before the end of the week AIG again made headlines by managing to get some oxygen in 'Trauma Care'.
As I am writing this, In U.S a 'Fabulous' $700 billion bail-out plan is being announced. Maye be Fed would be funding using revenue from the Treasury notes. About 40% of U.S treasury notes are held by foreigners. India's current forex reserve is about $250 billion, China has about a $trillion in reserve. I dont know much of is already made its way to U.S treasuries. But it is certainly a risky investment. As recommended by the 'Tarapore Commission', to safegaurd itself, India should consider maintaining its reserve as commodities rather than foreign currencies. If not 'what happened to investment banks' today can happen to Indian forex investments in treasuries.
We never know. May be every thing will be fine after 1 or 2 years or may be Capitalism is at the crossroads? God Bless America.
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