Articles from 03/16/08 to 03/22/08

The Fed is getting credit, in an indirect sort of way, for the sharp drop in commodity prices in the last few trading sessions. Analysts are telling me they think the wide range of actions the Fed has taken in response to the credit crisis will help contain the problem without much more in the way of interest rate cuts. That helps curb the inflation--hedge rush to commodities. It is also good for the dollar, and a stronger dollar leads to lower commodity prices. They also point to the Fed statement indicating it sees a sluggish period ahead for economies world-wide. That would mean lower demand for commodities and, therefore, lower commodity prices.

But volatility, most say, will be the name of the game for the near term. So fasten your seatbelts.

Regulators are pro-cyclical. Meaning, they usually get aggressive right after markets tank and financial conditions weaken. To put it bluntly, regulators usually come in after the battle and shoot the wounded. That makes the survivors more cautious, tightening credit conditions, prolonging the downturn.

Even so, there is no denying regulation needs to be tightened. If you doubt that, look at the quote from Alan Greenspan in my last post

Rep. Barney Frank laid out some good ideas today, much more thoughtful than what we've seen from the President's Working Group on Financial Markets. As Chairman of the House Financial Services Committee, Frank will have a large say about how regulators do their work going forward. His idea of a super-regulator to look at risk across the financial markets is intriguing. But is the Fed the right institution to do it? They clearly haven't distinguished themselves as regulators in the recent past. The Fed missed the growing mortgage fraud and the systemic risk posed by Mortgage Backed Securities.

What makes us think the Fed will do better next time?

The Bush administration spent years trying to limit Fannie Mae and Freddie Mac’s role in the mortgage market for fear that a collapse of one (or both) of the companies would wreck the economy.

When the credit crisis first hit this summer, some lawmakers wanted to quickly expand the role of Fannie and Freddie. But the administration resisted.

When I talked to James Lockhart, who heads the Office of Housing Enterprise Oversight, last November, he told me the firms had the flexibility they needed to participate in the mortgage market. Just last month, when OFHEO lifted the portfolio limits on Fannie and Freddie, he said the capital requirements would be reduced in increments over time and that the regulator would take a “very careful” approach. Today, Lockhart helped announce a new initiative that will allow Fannie and Freddie to purchase or guarantee trillions of dollars in mortgages.

Add this quote to the "ouch" collection:

"Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief."

Hmmm. Translation: the market did not work. Maybe next time we should try some oversight.

Here’s what I was always told: When you buy stock in a company, you become a part-owner of the firm. However, since you can’t spend your time running the company, you delegate your authority to a group of corporate directors, whom you and other shareholders elect. And to paraphrase former General Motors Chairman Charles Wilson, “What’s good for shareholders is good for the company,” right?

Well, it all depends who you ask. In producing NBR’s "Trouble at the Top" special (which will air this Friday), I learned that this conventional wisdom is not universally accepted. In fact, it is the subject of a major dispute between some of the biggest experts on corporate governance.

This may go down as one of my all-time favorite financial quotes:

"It is no longer OK to be in a black box," Lehman Chief Financial Officer Erin Callan told The Associated Press. "There will be a lot more honesty from us as an industry, and it is painfully obvious this will be the biggest change."

Apparently all the mandated disclosure, filings, accounting requirements were not enough to help people understand what was going on at the world's largest investment banks. No wonder people in Washington are beginning to talk about regulating investment banks more closely.

The Fed split the difference with today’s 3/4 point cut in interest rates. Those who see recession on the horizon were pushing for a full one percent cut while those worried about inflation sought a half point or less.

There were two dissents from today’s vote by Open Market Committee members who wanted a smaller cut. And a yellow flag was also waved by the regional bank presidents: Only three called for a corresponding 3/4 point cut in the discount rate.

Analysts say this means the next cut, if there is one, will likely be only 1/4 or perhaps 1/2 a percentage point.

Assuming the Fed cuts short term interest rates to 2% or close to it today, what happens next?

Can the Fed keep cutting rates? How low could it go?

If you want answers, consult the authority. Ben Bernanke answered this question in a speech given almost six years ago.

Let's hope it doesn't need it, but the Fed has plenty of ammunition left.

Outside of the financials... stocks were surprisingly strong today. Last night as news was unfolding about JPMorgan's purchase of Bear Stearns at $2.00 a share and the Federal Reserve's emergency cut in the discount rate... I found myself thinking... you better get to bed early, 'cause it's going to be a long day on Wall Street. I wasn't far off, but I was certainly surprised to see the damage contained to the financials, especially when everything I'm reading calls the current credit environment "unprecedented."

We'll have three takes on the story tonight... first, Suzanne Pratt with what the deal means for JPMorgan and Bear. Second, Erika Miller looks at who could be the proverbial next shoe to drop among the financials. Third, Darren Gersh looks at the Fed's role and the tools it has left in its box to help solve the credit crisis.

And, NBR's Susie Gharib will also talk one on one with banking analyst Dick Bove of Punk, Zeigel & Co. He has been perhaps the most vocal of the analysts covering the banking and brokerage sector, and tonight his take on this crisis is no less alarming.

It was nice to talk to someone who is actually positive on the stock market for a change, despite the turmoil in financial stocks.

Tony Dwyer, equity strategist with FTN Midwest Securities, says, “when a major brokerage firm goes out of business, that’s typically the end of a crisis not the beginning of it.” He also says every major market bottom is created by a financial crisis, something I hadn’t thought about. He thinks the fear of “another shoe to drop” has already been deeply discounted in stock prices.

That said, he doesn’t recommend buying into financials just yet...