Bernanke's, Paulson's, Bair's, and Cox's Banking Crisis Next Step
Companies / Credit Crisis 2008 Jul 27, 2008 - 04:05 PMBy: Mike_Shedlock
The Fed, the FDIC, the SEC, and the treasury department are all in panic mode. Here are the key players: Ben "Helicopter Drop" Bernanke is Fed chairman. Sheila Bair, the "Bureaucrat's Bureaucrat", is the FDIC chairman. Henry "Sound Dollar Policy" Paulson is Secretary of the Treasury, and Christopher "Big Squeeze" Cox, Chairman of the SEC, is on a selective campaign against nudity. Before we get to "What's Next?", here is a short recap of actions taken to date: Bernanke has produced an array of lending facilities (TAF, PDCF, TSLF). Bernanke also likes throwing surprise parties during options execution week. The first was a surprise discount rate cut. A second was a surprise rate cut.
Henry Paulson, who would not know or admit to (take your choice) a strong dollar policy if it bit him in the ass, has stated financial institutions must be allowed to fail only to reverse course a few days later by asking Congress for unlimited funds to bail out Fannie Mae and Freddie Mac.
Sheila Bair wants to monitor blogs for exactly the wrong reasons, and Christopher Cox who also likes surprise parties, threw one of his own during options expirations week by selectively deciding to enforce restrictions on naked shorting. The action by Cox action triggered a big short squeeze in equities. However, the credit markets did not seem too impressed with it.
Mind Of An FDIC Bureaucrat
Given the above, let's now see if we can figure out what a bureaucrat might do.
There is clearly a run on the bank at Washington Mutual. By now, few if any, large corporate accounts above the FDIC limit remain at WaMu. Indeed, any public corporation holding money at WaMu above the FDIC limit is an immediate short on grounds of stupidity.
With that in mind, and looking from the perspective of the bureaucrat's bureaucrat, there may be nothing for the FDIC to lose by declaring "all deposits at Washington Mutual are FDIC insured".
Eyes Of The SEC
The SEC, (another useless bureaucratic organization) is as likely as not to look at the short term "success" of the recent short sake curbs and place a shorting curb on Washington Mutual, Wachovia, and other banks.
If the SEC tries that and it does not work (here is a hint in advance ... it won't work), the next step would be to curb naked short sales across the board (except of course - nudge nudge wink wink, favored broker dealers).
It would be very difficult to restrict all short sales. However, the SEC might "temporarily" restore the uptick rule.
For a bit of background history, it was the SEC who is directly responsible for the sad state of affairs with the rating agencies. For more on this idea, please see Time To Break Up The Credit Rating Cartel .
The section to read is about how the SEC in 1975 ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). This created government sponsorship of Moody's, Fitch, and the S&P. Now, no one can possibly trust their AAA ratings on mortgages or for that matter anything else. Those who did trust AAA ratings on mortgages, paid through the nose.
Instead of ending sponsorship of the ratings cartel, look for the SEC to add another layer of useless bureaucrats to regulate the agencies. The bureaucrat's solution is nearly always to add more bureaucrats. Expect more of the same from the SEC.
What's Next At The Treasury?
The only thing Paulson is good at is yapping about the strong dollar and making proposals to Congress for unlimited money. Expect to see more of the same. Fortunately, Paulson will be gone after the next election.
Possible Actions By The Fed
Earlier this year Bernanke Asked Congress For Power to Pay Interest on Reserves . Expect to see another pitch for this authority at any time. Of course there is always the chance for another surprise party rate cut during options expiration week.
The One Thing They All Won't Try
There is one thing they all won't try and it's the only thing that would work: nothing. It is going to take time and price (lower prices in housing and equities), and more savings instead of more bailouts to fix this mess. So all the Fed, the SEC, the FDIC, and the Treasury Department are doing is prolonging the agony while making matters worse.
And one of these times, one of the above players is going to make a surprise announcement and the market will respond with a surprise party of its own: immediately selling off then opening lock limit down the next day in the futures market. That will be the big warning that all these actions are counterproductive. Just don't think any of the above players will heed the message.
By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.
I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .
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