What Happened?
Posted by T.W. Hanson - Mar 11th, 2008 at 20:03
The Dow finished the day up 416.66 points or 3.5%. The rally began before the market opened and continued through the day. These moves weren’t echoed in the larger credit market, but we will get to that in a later post. What did happen was that the Federal Reserve decided to make available $200 billion to banks, and what is unique is what the banks can post as collateral.
The banks can now borrow that $200 billion using the highest rated pools of defaulting mortgages as collateral. This is intended to free up capital to help the markets function properly.
Many analysts were pointing to a negative feedback loop in the credit markets last weeks as cause for real concern. Hedge funds like Carlyle and Peloton and institutions holding mortgages like Thornburg were receiving margin calls from banks. This forced them to liquidate securities for which there wasn’t a robust market. This depressed prices in those markets. Other holders of the these securities were facing margin calls, and these events threatened a serious melt down in the capital markets. This infusion by the Fed should help ameliorate some of these issues.
That being said Bear Stearns was down approximately 10% at times during today’s trade on fears that it doesn’t have adequate liquidity to operate. And, it cannot be stated enough, the credit markets moved in a very muted fashion compared to equities today.
The question is what has the Fed done. Have they lanced the boil, provided adequate antiseptic and bandaged the wound properly or given the wound a third shot of cortisone and left the rest to the audacity of hope?
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I heard the cheerleaders on CNBC fawning over the market today, saying how it’s “the best day for the Dow in 5 years!”
What they failed to mention is that the Dow is still down for the week, the month, and the year. Gee whiz, let’s celebrate!
It’s analogous to claiming “I managed to lose 10lbs overnight!” when really you cut off your arm.
Comment by Tad Johnson — March 11, 2008 #