by Martin D. Weiss, Ph.D.
Wall Street pundits would have you believe that the Fed has saved the
day, that the worst of the credit crisis is behind us, and that
there's nothing more to worry about.
My view: They're full of baloney! And for the evidence, look at what's
just hit the fan on Friday:
First, Standard & Poor's downgraded America's largest mortgage lender
=97 Countrywide Financial =97 to "junk."
The reason: Bank of America, which was supposed to be gung-ho about
saving Countrywide from bankruptcy, is getting cold feet.
In its latest filing with the SEC, Bank of America says it may not
want to back up all of Countrywide's debts after all. Instead, it may
decide to put $31.8 billion of Countrywide's debts in a separate
cor****ation. And analysts now suspect Bank of America may later take
that cor****ation into bankruptcy, stiffing Countrywide's bondholders.
So you can easily see why even S&P, typically slow to act, promptly
downgraded Countrywide's bonds to junk!
But I ask you: Is this a sign that the credit crisis is behind us?
Second, the Fed just announced that it's greatly expanding its Term
Auction Facility (TAF).
This is the new facility the Fed inaugurated last December to funnel
money to big banks in exchange for shakier-than-normal collateral. At
the time, they made it sound like a tem****ary, emergency measure, with
biweekly auctions of up to $20 billion.
Then, earlier this year, they expanded this facility to $50 billion.
And on Friday, they've just bumped it up =97 again =97 to $75 billion per
auction, or nearly FOUR times the original level.
So I ask again: If the credit crisis were truly behind us, why would
the Fed need to be di****ng out so much more money to the banks? It
makes no sense.
Third, the Fed also announced on Friday that it's expanding its Term
Securities Lending Facility (TSLF). This is the newer, more radical,
program whereby the Fed gives big brokers its high-quality Treasury
securities in exchange for inferior quality, toxic paper.
Until now, the Fed was accepting only securities based on home and
commercial mortgages. And given the sorry state of U.S. real estate,
that was bad enough.
However, the Fed's new rules, effective immediately, make it possible
to take in a lot of other garbage, including securities backed by
credit cards and student loans that may be going sour.
Is this the type of thing the Fed does when credit conditions are
improving? Or is this the sign of a Fed with its back against the
wall, still desperately searching for ways to put the crisis behind
us?
Fourth, all over the world, key long-term interest rates are rising.
In the U.S., the yield on long-term Treasury bonds has risen enough to
pierce through a critical 10-month downtrend, signaling further rises
ahead.
In Japan, yields on 5-year notes just shot up by the biggest margin in
nine years.
In Germany, the U.K. and virtually every country with a bond market to
speak of, long-term bond yields are starting to go up.
Does this sound to you like a prescription for ending the credit
crisis?
What will be the impact of higher interest rates on the millions of
homeowners in the U.S. with mortgages that are about to reset?
What will that do to the credit markets? To the dollar? To the entire
future of the U.S. financial system?
Good luck and God bless!
Martin
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