9/29T9:59 News & Notes

http://www.nytimes.com/2008/09/28/business/28melt.html?hp
Brilliant article explaining the AIG collapse as a result of credit default swaps.

http://www.bloomberg.com/apps/news?pid=20601213&sid=aWTSSbHblM74&refer=home
The effects of the credit crisis on the Muni Bond market
RCM Comment: One of Wall Street's most profitable functions has always been as a market maker of municipal debt instruments. There are 10's of thousands of different issues of varying maturities that would have no home without brokerage firms' willingness and ability to commit capital to carry municipal inventories. With the spreading capital destruction throughout the banking and brokerage community municipal debt inventories have become a primary casualty. As a result muni prices are declining and muni interest rates are climbing steadily higher. Unfortunately, for many municipalities the rising cost(interest rates) comes at a particularly poor time as revenues are under pressure from the housing decline. This formula has already produced a number of municipal bankruptcies this year. Unless this trend is reversed soon we believe municipal bankruptcies are likely to ascend to the top of Washington's agenda in the not to distant future.

Gold and silver dealer reports an ‘unprecedented’ shortage of metals Sunday, September 28, 2008 By David Clerkin, Markets Correspondent
‘‘This did not happen even in the 1930s and the 1970s, and will result in markedly higher prices in the coming months.”
A surge for demand in gold and silver has resulted in an unprecedented shortage of the metals for retail investors in recent days, according to Gold and Silver Investments, a Dublin-based firm that allows retail investors to speculate on movements in the value of precious metals.
Gold and Silver Investments director Mark O’Byrne said the supply of gold and silver available for small retail investors suffered a dramatic deterioration within hours on Friday, as wholesalers reported that government mints and refiners, the primary suppliers of the metals, had stopped offering new supplies.
‘‘It’s absolutely unprecedented,” said O’Byrne, who said the shortages were likely to drive up the costs of gold and silver in the secondary market.
‘‘This did not happen even in the 1930s and the 1970s, and will result in markedly higher prices in the coming months.”

RBC says that with legislation agreed upon, congress expected to pass T.A.R.P. bill within days; implementation several weeks away
RBC says the Troubled Asset Relief Program will be funded in three tranches; immediately with $250 bln, followed by $100 bln and finally with $350 bln (subject to Congressional disapproval). The second and third tranches need additional oversight to be funded. The Treasury's purchase authority will last two years. T.A.R.P. will be targeted to purchase residential and commercial whole loans and securities originated or issued on or before March 14, 2008. Plus any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability.

Iceland takes control of Glitnir - Guardian Unlimited
Guardian Unlimited reports the Icelandic government has seized control of one of the nation's biggest banks, Glitnir, the latest victim of the crisis gripping the world's financial markets. The move will stoke long-held fears that Iceland could be facing financial ruin. Officials said the government in Reykjavik had bought a 75% stake in the bank for €600 mln to prevent it from going bust.

ECONX Federal Reserve and other central banks announce further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity
In response to continued strains in short-term funding markets, central banks today are announcing further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures. Federal Reserve Actions The Federal Reserve announced today several initiatives to support financial stability and to maintain a stable flow of credit to the economy during this period of significant strain in global markets. We will continue to adapt these liquidity facilities as necessary and will keep them in place as long as circumstances require. Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmarks Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously. These steps are being undertaken to mitigate pressures evident in the term funding markets both in the United States and abroad. By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk. 84-Day Maturity TAF Auctions The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. TAF credit at the 28-day maturity will remain at $75 billion. The total amount of TAF credit available in the 28-day and 84-day auction cycles will double to $300 billion from $150 billion. Forward TAF Auctions The forward TAF auctions are a new program designed to provide reassurance to market participants that term funding will be available over year-end. The timing and terms of the two forward TAF auctions will be determined after consultations with depository institutions that utilize the TAF program. It is anticipated that there will be two auctions in November totaling $150 billion. These auctions will provide short-term (one- to two-week term) TAF credit over year-end. Foreign Exchange Swap Lines The Federal Open Market Committee (FOMC) has authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide funding for U.S. dollar liquidity operations by the other central banks. The FOMC has authorized increases in all of the temporary swap facilities with other central banks. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the ECB, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by the Sveriges Riksbank, and $60 billion by the Swiss National Bank. As a result of these actions, the total size of outstanding swap lines is $620 billion. All of the temporary reciprocal swap facilities have been authorized through April 30, 2009. Dollar funding rates abroad have been elevated relative to dollar funding rates available in the United States, reflecting a structural dollar funding shortfall outside of the United States. The increase in the amount of foreign exchange swap authorization limits will enable many central banks to increase the amount of dollar funding that they can provide in their home markets. This should help to improve the distribution of dollar liquidity around the globe.
RCM Comment: Combine "expand significantly" & "US-dollar liquidity" in the same sentence and you get another way of saying, BUY GOLD!!!

ECB to offer banks extra cash through end of year - Bloomberg.com
Bloomberg.com reports the European Central Bank said it will make additional funds available to banks through the end of the year in "special'' auctions to ease tensions on euro-region money markets. The Frankfurt-based ECB said it will loan banks extra cash today for 38 days. "The special term refinancing operation will be renewed at least until beyond the end of the year,'' it said in a statement. Bids must be submitted by 1 p.m. Frankfurt time. The world's largest central banks are injecting liquidity into money markets as more than $550 bln in writedowns and losses tied to the U.S. mortgage market prompt banks to stockpile cash to meet their own funding needs. The ECB said it will continue "to steer liquidity towards balanced conditions in a way which is consistent with its objective to keep very short-term rates close to the minimum bid rate'' of 4.25%. Today's auction will be conducted at a variable rate with no pre-set amount, the ECB said.
RCM Comment: Last week the ECB tried to say the problem in Europe was not as acute as the US. This week they are singing a new tune. Question: Are central bankers around the world: A) Clueless B)Delusional C) Diabolical. You can find the answer in tomorrow's blog.

9/26T8:53 New & Notes

Short-sale ban wallops convertible-bond market - WSJ
WSJ reports the SEC's ban on short selling of financial stocks has effectively shut down much of the convertible-bond market, a crucial area of financing for struggling companies. Convertible securities are essentially bonds that can be exchanged for stock in the future. It's a relatively small market with less than $400 billion in securities outstanding, according to market participants, a fraction of the total for investment-grade bonds. But in times of stress, struggling companies turn to convertibles in order to raise capital when a share price has fallen. "At least 75% of investors" in convertible securities hedge their positions, Elliot Bossen, chief investment officer of Chapel Hill, N.C., Silverback Asset Management, wrote in a letter to the SEC and lawmakers Wednesday. "This important source of capital will disappear entirely," if the rules remain in effect, he wrote, adding that the SEC's move "contributed to the seizing up of liquidity in the market for convertible securities."... Traders say the impact has been clearly visible in the prices of convertible securities. Typically, when a stock falls, converts fall about one-third as far the common shares. Instead, convertibles on financial names have been suffering big losses compared with the stocks.
RCM Comment: They know not what they do.

China allows short sales, margin loans to help market - Bloomberg.com
Bloomberg.com reports China's cabinet agreed to let investors buy shares on credit and sell borrowed stock to help develop Asia's second-largest market after prices and trading volumes slumped, an official familiar with the plan said. The State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling, said the official, who declined to be identified as he isn't authorized to speak on the issue. China's action contrasts with regulators in the U.S., Europe and Australia that have banned short selling in the past week to shore up financial shares battered by the global credit squeeze. China's government is betting the changes will boost trading without spurring further declines after state share buybacks helped the CSI 300 Index rebound from a two-year low.
RCM Comment: Since when is China more progressive and more 'free market' than the US?

9/25T8:58 News & Notes

FDIC may need $150 bln bailout as local bank failures mount - Bloomberg.com
Bloomberg.com reports FDIC insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in. The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out all of their funds. It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 bln in its coffers as of June 30, far short of the $200 bln Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue. Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 bln -- not including the $700 bln general Wall Street bailout now under discussion in Congress. That number would be even higher if the government were on the hook for uninsured deposits -- which amount to $2.6 trillion, 37% of the total of $7 trillion held in the U.S. branches of all FDIC member banks... As recently as March, an internal FDIC memo estimated the cost to cover bank collapses in 2008 would be just $1 bln, dropping to $450 mln in 2009. It wasn't even close. The IndyMac failure alone, which happened four months after that memo was circulated, will cost the FDIC $8.9 bln -- and the bill for all 12 collapses will be about $11 bln, the FDIC says.

TED Spread widens to record 317 basis points - Bloomberg
Briefing.com note: The TED Spread (ticker .TEDSP Index on Bloomberg) measures the price spread between active three month U.S. Treasury bill futures contract and the 3 month eurodollar futures contract (for which LIBOR is used as the proxy). A higher spread indicates banks are less willing to lend to each other. As such, it's used as an indicator of credit risk and investor confidence in the U.S. markets. The spread has widened materially over the past few days as the $700 bln rescue plan is being debated in Washington. The spread was only 1.2105 only two weeks ago. During the failure of Bear Stearns, it briefly touched over 2.0.
RCM Comments: We monitor the TED spread and LIBOR rates to see if the credit crisis is easing. So far all the talk of financial bailout has not helped to ease the real problem: lack of liquidity.

China lenders ordered to halt interbank deals with US cos - SCMP.com
SCMP.com reports China regulators have told domestic banks to stop lending to United States financial institutions in the interbank market in a bid to prevent possible losses during the financial crisis, industry sources said yesterday. The ban from the China Banking Regulatory Commission applied to interbank lending of all currencies to US banks but not to banks from other countries, a source said. The decree appears to be Beijing's first attempt to erect defences against the deepening US financial meltdown after the mainland's major lenders reported billions of US dollars in exposure to the credit crisis. Another banking source said the CBRC issued the ban after obtaining data about the exposure of mainland banks to bonds issued by bankrupt Lehman Brothers. Top officials said they were keeping a close watch on the crisis and warned mainland financial institutions to be cautious in their daily business and overseas expansion
RCM Comment: Question: If the Chinese government is directing the private sector to stay away from US debt, how far away is the decision for the government itself to begin limiting the amount of US Treasury debt it buys? This reduced Chinese buying will be devastating for the US$ as it will lead to higher interest rates and will be very bullish for gold.

GMT Comments

Global Money Trends:

The dollar came under heavy selling pressure after US Treasury chief Paulson said
subsidiaries of foreign banks doing business in the US are eligible for the taxpayerfunded
bailout. European banks welcomed the plan, and could dump up to $58 billion
of toxic mortgages US taxpayers. Japanese banks hold $9.3 billion in US sub-primemortgages.
That leaves the US-dollar and its economy in a weaker position relative to
other currencies, since the world’s biggest debtor is bailing out foreign banks!

McCain’s reaction to the meltdown was anything but presidential, and Obama grabbed
the lead in the opinion polls, as consumer confidence was badly shaken by the turmoil
on Wall Street, and instability in the banking system. Obama’s odds of winning the
White House rebounded from as low as 43% at Dublin’s inntrade.com, to as high as
51.2% on Friday. In turn, the Euro climbed from $1.40 towards $1.470, and the lowly
British pound, recovered from as low as $1.750 to above $1.850.

Crude oil market rebounded from a seven month low of $90.55 /barrel, and is zeroing
in on $110 this week. Any further missteps by McCain this week, such as a poor
showing at the upcoming presidential debate on Friday night, could lift Obama at the
online betting parlors, boost the Euro higher vs the US$, and in turn, could send
crude oil towards $115 /barrel. Gold and silver are also tracking oil and the Euro, and
traders are increasingly convinced that the Federal Reserve will end-up monetizing a
large chunk of the upcoming supply of US Treasury debt, thereby fueling inflation.

9/24T8:45 News & Notes

GS Goldman Sachs: Buffet Interview on CNBC
Says not a time thing but a price thing... 'price is right. terms are right, people are right, and I decided to write a check'... 'If I did not think the government was going to act I would not doing anything this week I would be pulling back'... says it would be a mistake if the government walks away from Paulson proposal... not saying Paulson plan eliminates all the problems, but it keeps us from going of the precipice... says the market could not have taken another week like we saw last week... says it is everybody problem; economy is like a bath tub, 'you can't have cold water in the front and hot water in the back'... says collapse of institutions involved would have halted industry... 'no plan will be perfect buy I am happy Paulson has the imagination to step up and do something'... notes money market fund move by Paulson was a very important stroke... believes things will get worse if Congress doesn't approve a plan, or a plan close to the Paulson proposal... says every major institution is trying to de-leverage and you need someone to leverage up and the only one that can do that is the U.S. government... says if the government does it right they 'will make a lot of money'... says should not pay what the institutions paid or what they are carrying on their books but whart they are worth; 'I will bet that they will come out with a profit'... says he is not buying any instruments because he does not want to leverage up... says private sector can not save the system because they can not borrow as cheap as the U.S. government... says should not write executive pay out of the Paulson plan but the oversight board shpould be very strict on managers... throws his support behind Paulson... first investment Buffet has made in an Investment bank since Solomon back in 1987 which did not work out well; believes this deal is much better.

Credit Suisse initiates the Oil and Gas Services with an Overweight
Credit Suisse initiats the Oil and Gas Services with an Overweight saying they believe world commodity fundamentals, customer cash flows and continued low reinvestment rates are supportive and that the sector has years of growth ahead of it. They say the commodity correction and stock trajectory has been startling to say the least, but they are convinced it has created opportunities to buy shares. The firm initiates Baker Hughes (BHI) tgt $85, FMC Technologies (FTI) tgt $69, National Oilwell Varco (NOV) tgt $77, Smith (SII) tgt $80, and Weatherford (WFT) tgt $40 with Outperforms. They also initiates BJ Services (BJS) tgt $22 with an Underperform and Schlumberger (SLB) tgt $104, Halliburton (HAL) tgt $44, Cameron (CAM) tgt $51, Exterran (EXH) tgt $42, Global Industries (GLBL) tgt $10, and Oceaneering (OII) tgt $72 with Neutrals.

Libor's accuracy becomes issue again - WSJ
WSJ reports the accuracy of a widely used interest rate, seen as critical to judging the health of the financial markets at a precarious time, is coming under question for the second time this year. Doubts about the Libor center on whether banks are understating what it costs them to borrow dollars in stressed financial markets. Libor's reliability became an issue again this week when banks paid higher interest rates to borrow using collateral than they did for unsecured loans... Concerns about Libor's accuracy emerged out of the rates being paid in another market used by banks to get cash. The Federal Reserve's term auction facility, one of numerous efforts the Fed has been using to fight the credit crunch, allows banks to borrow, but they must put up collateral. Because of that, banks should be able to pay a lower interest rate than they do when they borrow from each other because those loans are unsecured. In other words, the rate for the Fed auction should be lower than Libor. But on Monday, the rate for the 28-day Fed facility was 3.75%, which was much higher than Libor. On Monday, the one-month dollar Libor rate was 3.19% while Tuesday's rate was 3.21%. The Fed facility should be lower, said Scott Peng, a Citigroup U.S. rate strategist. The "market needs some accurate transaction-based measure of interbank lending."

Money-market rate climbs as bank funding constraints worsen - Bloomberg.com
Bloomberg.com reports the cost of borrowing in dollars increased after banks paid a record premium for cash at yesterday's Federal Reserve auction, underscoring the shortage of funds available on money markets. The one-month London interbank offered rate, or Libor, for dollars rose 22 basis points to 3.43%, the highest level since January, the British Bankers' Association said today. Financial institutions paid 3.75% at the 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December. "We've seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday's one-month Libor will no doubt add to that,'' said Barry Moran, a Dublin-based money-market trader at Bank of Ireland. "It's a bit of a lottery as to where Libor will set.'' Demand for central bank loans backed by collateral surged this week as financial institutions hoard cash and balk at lending to each other on concern more banks will fail. Libor loans aren't secured and typically command rates above those of secured loans of similar maturities.

CLR Continental Resources announces additional well completions in North Dakota Bakken shale (42.88 )
Co announces initial production results for four wells that it recently completed in the northern portion of its North Dakota Bakken acreage, including its fifth well targeting the Three Forks/Sanish formation. The Omar 1-1H in Williams Co. flowed at an average rate of 1,126 barrels of crude oil equivalent per day from the TFS formation during its seven-day production period test. The Omar 1-1H was drilled as a single lateral on 1,280-acre spacing. Also in the northern portion of Continental's North Dakota acreage, the co completed three wells targeting the Middle Bakken zone. The co completed the Bliss 1-16H in Divide Co., the Skar 1-21H in Divide Co., and the Overlee 1-30H in Burke Co. for average rates of 476, 394 and 198 boepd respectively in their seven-day production period tests. The three wells were completed as single laterals on 1,280-acre spacing.

Fed sets $30 bln swaps lines to ease credit strains - Reuters
Reuters reports the Federal Reserve said on Wednesday that it had set up $30 bln worth of new currency swaps with central banks in Australia and Scandinavia, marking its latest bid to ease global credit market strains. The action comes on top of $247 bln that has already been committed to currency swaps with other major central banks, as authorities battle a global credit crunch sparked by the collapse of the U.S. subprime mortgage market last year. "These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets," the Fed said. "Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises," it said in a statement. The Fed said it had established temporary reciprocal currency swap lines of up to $10 bln each with the Reserve Bank of Australia and Sweden's Riksbank, and $5 bln swaps with Denmark's Nationalbank and Norway's Norges Bank. It said the swaps were specifically aimed at addressing elevated pressures in U.S. dollar short-term funding markets. The swaps have been authorized until January 20, 2009, the Fed said.

9/23T8:48 News & Notes

SEC quickly revises short-selling rules - WSJ
WSJ reports the SEC said shortly after midnight Monday that it would revise rules to curb short selling that it had issued just three days before. The SEC's latest change of direction on short selling caught some market participants off guard and prompted criticism that the agency has miscalculated the impact of its rulemaking. The SEC, in a release issued at 12:26 a.m. EST Monday, reversed a position it had taken Friday when it said that market makers couldn't short financial stocks after Friday. The new rules as of Monday: Those engaged in bona fide market making and hedging activity, including in derivative contracts, could continue to short. "The purpose of this accommodation is to permit market makers to continue to provide liquidity to the markets," the SEC explained in the revised order. To try to prevent short sellers from using market makers to take big positions, the SEC said market makers couldn't short for a customer if it would give them a net short position in the security.
RCM Comment: This is the follow up to last week's obvious manipulation.

9/225:08 News & Notes

RCM Comments: The US is being hung out to dry on the bailout, which is even more bullish for gold and bearish for the US$

Group of Seven partners cool to U.S.-style bailouts - Reuters.com
Reuters.com reports U.S. allies spurned entreaties from Washington that they enact large-scale financial bailouts, saying their banks were not exposed to the same level of reckless lending that put the American economy at risk of a deep recession. While some European central banks offered more funding for stressed financial markets and Japan said it would offer dollar liquidity, finance ministers from the Group of Seven rich nations, who consulted by phone, issued only guarded promises to cooperate in efforts to keep market turmoil in check... After Monday's conference call with G7 counterparts from Canada, Britain, France, Germany, Italy and Japan, there was no sign any of the other countries planned the same tack. "We pledge to enhance international cooperation to address the ongoing challenges in the global economy and world markets and maintain heightened close cooperation between finance ministries, central banks and regulators," the G7 officials said in a statement. However, they showed no appetite for mimicking the U.S. proposal. "At the moment, I don't think Japan needs to launch a program similar to that of the United States," Japanese Vice Finance Minister Kazuyuki Sugimoto told reporters in Tokyo, echoing comments from France, Britain and Germany.

9/228:59 News & Notes

A great link:http://www.nytimes.com/2008/09/20/business/20nocera.html?pagewanted=2&_r=3&ref=business

Short-sale ban spreads around globe - WSJ
WSJ reports the effort to quash short selling gained momentum around the globe Sunday as Australia, Taiwan and the Netherlands announced restrictions to prevent investors from betting that stocks will decline. Sunday, Australia banned placing short sales on any stock, taking it further than its decision Friday to tighten such rules. Taiwan will ban short selling of 150 of the market's heavyweights when they trade below the previous session's closing levels for the two weeks starting Monday, the Financial Supervisory Commission said. Dutch regulator Autoriteit Financi?le Markten, or AFM, banned so-called naked short selling of financial institutions for three months.

CNBC reports there have been additional stocks added to the SEC's list of stocks protected against short-selling; additions include GE, BMO, LM, GM, COF, MCO

Central banks may expand range of collateral, Nikkei says - Reuters.com
Reuters.com reports central banks in the United States, Europe and Japan will consider taking foreign-denominated assets as collateral in an effort to provide liquidity for battered financial markets, the Nikkei newspaper said on Sunday. Currently most central banks only accept assets denominated in their home currency as collateral, the paper said. If central banks were to accept assets denominated in other currencies, cash-strapped firms would be able to get funds easier, it said. Six central banks, including the U.S. Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England are discussing a potential rule change, the Nikkei said.

RIG Transocean: Free cash flow options could create significant shareholder value - FBR (114.79 )
Friedman Billings notes that RIG should generate 22% of its market cap in free cash flow before the end of 2010, according to firm's ests. Firm's special dividend and share repurchase models outline the significant potential upside from these two scenarios. The co's growing backlog and debt reduction should allow the co to begin using FCF to create shareholder value starting in 2009. Firm believes either a commitment to a consistent special dividend over the next several years or an aggressive share repurchase program would both be very beneficial for shareholders. Firm encourages mgmt to more vocally lay out to investors what its plans are for Transocean's cash flows over the next several years, which they believe should be massive
RCM Comment: Following our theme of a resurgent commodity market, drilling stocks lead the pack. Added to this theme is a positive political environment for increased drilling.

Dollar may get 'crushed' as traders weigh up bailout - Bloomberg.com
Bloomberg.com reports Treasury Secretary Henry Paulson's plan to end the rout in U.S. financial markets may derail the dollar's three-month rally as investors weigh the costs of the rescue. The combination of spending $700 bln on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates. "As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts, the world's biggest currency hedge-fund firm, which manages about $15 bln.
RCM Comment: INFLATION!!!!!!!!!!!!!

U.S. widens scope of bad-debt plan beyond home loans - Bloomberg.com
Bloomberg.com reports the Bush administration widened the scope of its $700 bln plan to avert a financial meltdown by including assets other than mortgage-related securities. The U.S. Treasury submitted revised guidance to Congress on its plan late yesterday as lawmakers and lobbyists push their own agendas. The department also adjusted its plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists. Officials made the changes two days after unveiling plans for an unprecedented intervention in financial markets. The change to potentially allow purchases of instruments such as car loans, credit-card debt and other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress. Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide. Separately, the Treasury said in a statement late yesterday it would limit its $50 bln plan for insuring money-market funds to those held by investors as of Sept. 19, excluding any subsequent contributions.
RCM Comment: This story only begins to uncover the truly grotesque nature of this bailout. The bailout is obviously becoming a massive land grab by special interests. Anyone who believes that the number of $700 billion is the cap on the plan is dreaming. This activity is creating the best entry point for investing in commodities (especially precious metals) that we have seen in a long time.

Foreign banks hope bailout will be global - NY Times
NY Times reports foreign banks, which were initially excluded from the bailout, lobbied successfully over the weekend to be able to sell the toxic American mortgage debt owned by their American units to the Treasury, getting the same treatment as U.S. banks. On Sunday, the Treasury secretary, Henry M. Paulson Jr., indicated in a series of appearances on morning talk shows that an original proposal introduced on Saturday had been widened. "It's a distinction without a difference whether it's a foreign or a U.S. one," he said in an interview with Fox News. The prospect of being locked out of the bailout set off alarm bells among chief executives of overseas banks whose American affiliates also hold distressed mortgage-related assets, like Barclays (BCS) and UBS (UBS). The original text provided access to the $700 bln bailout for any financial institution based in the United States. As the day wore on, some raised their concerns with the Treasury Department, arguing that foreign institutions were both big employers and major players in the American capital markets. By Saturday evening, the language had been changed to allow any financial institution "having significant operations" in the United States. While Mr. Paulson has agreed with that argument, the Bush administration is also leaning on foreign governments to pitch in with bailout programs of their own as needed. "We have a global financial system and we are talking very aggressively with other countries around the world, and encouraging them to do similar things, and I believe a number of them will," Mr. Paulson said on Sunday.
RCM Comment: The bailout gets bigger and bigger.


Goldman, Morgan scrap Wall Street model, become banks in bid to ride out crisis - WSJ
The Wall Street Journal reports the Federal Reserve, in an attempt to prevent the crisis on Wall Street from infecting its two premier institutions, took the extraordinary measure on Sunday night of agreeing to convert investment banks Morgan Stanley (MS) and Goldman Sachs (GS) into traditional bank holding companies. With the move, Wall Street as it has long been known will cease to exist. Morgan and Goldman will come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed. This fundamentally alters the landscape," a Goldman Sachs spokesman said Sunday night. "By becoming a bank holding company and being regulated by the Federal Reserve, we have directly addressed issues that have become of mounting concern to market participants in recent weeks." Morgan Stanley officials have been talking about this option internally for several months, and Fed officials have been stationed at the bank since the crisis intensified earlier this year. After last week's market crisis, Morgan Stanley officials asked the Fed to speed up its review and grant the bank designation sooner. "It became clear that the world had changed," said Morgan Stanley spokeswoman Jeanmarie McFadden. She said that the firm would reduce its leverage ratios over the next few years from current levels to something more in line with that at commercial banks.

RCM Comment: The little old men are hard at work...

It is Sunday, late afternoon, as I type these words. I have spent the day on the beach, surfing and taking in the beauty of it all. At one point I found myself resting on my board about 100 yards offshore right past the break on the ocean side of the sand bar. Much to my chagrin, I was snapped out of my Zen-like state by the appearance of angular dorsal and tail fins. Judging from the distance between tail and dorsal I figure a 6-7ft predator arrived to keep me company. While I appreciated his attempt at camaraderie I somehow felt it was time to get dry.


While lying on the beach catching my breath the events of the week unfolded for me in slow motion. There is no doubt that the little old men (Paulson, Bernanke & Cox) were hard at work behind the curtain. In fact, they have brazenly torn down the curtain and are pulling the strings ever more frantically as they try to arrest the rapid unraveling of the financial system. Will their efforts be rewarded? Will the financial system now right itself? No one knows the answers to these questions. Only time will tell, but I can offer one silver lining to last week's grotesque events: The next leg of the commodities bull market has begun.


Perhaps you do not wish to simply take my word for the impending rise in commodity prices and would feel better coming to your own conclusions. Ok, no offence taken, the following will be a brief review of some of the events that have recently occurred. You be the judge:


Paulson: Spearheading a massive government bailout of the banking system. Announced on Thursday last week, Paulson will be stiff arming Congress into creating a RTC-like receptacle to buy the hundreds of billions of dollars of bad debt on the books of US banks. In Ffinance 101 we call this monetizing the debt.

-The plan necessitates raising the ceiling for the national debt and spends as much money as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies...

-And he wants to do all this with impunity, "Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Bernanke: Helicopter Ben, as he is known, continued to 'drop cash out of helicopters' last week with a $50 billion repo on Thursday. Money supply, as judged by M3, continues to grow at an alarming clip. Economics 101: Increasing supply of an asset without subsequent increase in demand leads to declining value of said asset. Applied to the US$ this simple supply and demand equation will give the investing public an appetite for an asset that cannot be created out of thin air with some paper, ink and a printing press. (Am I leading the witness? Sorry.)

Cox: The SEC delivered a cease and desist order to the short sellers on Thursday. While this action does not immediately correlate to the buying of commodities I list it for two reasons. 1) The manipulation is too egregious to ignore. Cox made the announcement on the most volatile day of the month; Thursday of options expiration week and in this case triple witching (Stocks, Futures, Indices). As if that wasn't enough manipulation, Cox felt it necessary to completely disrupt the option market makers by including them in the list of short sellers denied their rights. Late Friday, after the damage had been done, Cox quietly announced he will reconsider the option short seller rule. Now we are left with only two choices to believe. Cox is either really dumb and didn't know how the option rule would effect the market, or he is manipulative in a fascist sort of way knowing full well the effect and having every intention of "reconsidering" after the shorts had been fully routed. 2) A major source of income for the hedge fund world has come from shorts this year. Left with no ability to make money in this arena now, a large source of funds will need another place to congregate. We believe it will find the commodity space.

-In a separate manipulation: The SEC is going to let companies buy back their own stock in the last 30 minutes of trading. This action has been illegal until now because of the obvious temptation for companies to "paint the tape".

Commodities withstood a severe shake out over the last 9 weeks, why?

-US$ rally of 14%+ due in part or in whole to a massive repatriation of money. $s invested in Euros, Yen, Reals, Rubles, and Yuan experienced destruction in value as the corresponding stock markets collapsed. Russia and China have seen their markets drop more than 50% while even the European averages have declined more than 30%. A lot the US money invested overseas came roaring home in a tsunami of repatriation. The US$ rally is now over. The Paulson plan, along with plans coming out of Russia and China, should stabilize markets and of course remember Econ. 101: too much supply of US$ will reduce their value.

-Fear of world wide economic depression and deflation. Those fears are over for the time being as governments all around the world are developing plans to reflate. (What investments do well in an inflationary environment?)


Technical analysis: Commodities are still in long term up trends. In fact, many have found support in recent weeks at or near their long term uptrend lines. This sector was very overbought and needed to shake out the weak holders as well as build a base to launch the next leg up. Based on our work here at RCM we feel this correction process is near its completion and the soil is ready to plant for the next bumper crop. (Too much imagery? Maybe, but I'm having fun here so indulge me.)

1:11 Short sale rule change...

Follow up on earlier headline on FSA to ban short selling on financial cos
DJ reports the U.K.'s Financial Services Authority said Thursday it will temporarily ban the creation or increase of net short positions in publicly-quoted financial companies from 2300 GMT. The regulator also said it will require, from Sept. 23, daily disclosure of all net short positions in excess of 0.25% of the ordinary share capital of financial companies at the end of trading the previous day. The FSA said these provisions will remain in force until Jan. 16, 2009 although they will be reviewed after 30 days. It said there will also be a full review of the rules on short selling published in January.

The market rallies quickly on the news that the short selling rules have changed in the UK. The big question remains; will this help or hurt the markets over the next few weeks? The knee jerk reaction is to rally the market as less selling can come into the financial stocks in the UK through the shorts. However, this will also create a lack of liquidity during a time when liquidity is sorely needed.

9/188:28 News & Notes

RCM Comments: These stories are all Gold bullish.

News:

Federal aid to Detroit seems likely - NY Times
NY Times reports after a series of government interventions in the private markets, one seemingly more astonishing than the next, lawmakers found themselves confronted on Wednesday with the question of when and where to draw the line on future aid. But with billions of dollars in financial backing already authorized for Wall Street, and with Election Day fast approaching, Congressional leaders seemed uninterested in denying help to large employers of blue-collar Americans. Even as lawmakers in both parties unleashed a barrage of questions about the wisdom of a government rescue for the American International Group, support seemed to be growing quickly on Capitol Hill for $25 billion in loan guarantees to assist the ailing auto industry. Both presidential candidates, Senator John McCain of Arizona and Senator Barack Obama of Illinois, have voiced support for the loan guarantees — an unsurprising stance given the critical importance of the main auto-producing states, Michigan and Ohio, to the electoral map this fall. The chief executives of the three big American automakers — General Motors (FM), Ford (F) and Chrysler — met on Wednesday afternoon with House Speaker Nancy Pelosi. When they emerged, they expressed optimism that the loan guarantees would be included as part of a budget resolution that is needed to finance government operations through the end of the year.

Fed says adds $50.00 bln of temporary reserves to banking system via overnight repo -
Reuters

Equity futures are higher with Fed announcing additional actions to improve liquidity, new SEC rules against short-selling in effect
Equity futures are trading higher this morning after the Federal Reserve announced coordinated actions with a number of other central banks to improve liquidity. The Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank engaged in a coordinated effort to address the continued elevated pressures in U.S. dollar short-term funding markets. The measures are designed to improve the liquidity conditions in global financial markets, with the FOMC authorizing a $180 bln expansion of its temporary reciprocal currency arrangements (swap lines). In addition to helping equity futures, these actions have also led to a decline in the overnight Libor rate to 3.84% from 5.0% yesterday and 6.43% the day before. This signals an easing of immediate liquidity concerns, demonstrating that banks are more willing to lend to one another overnight. There are also headlines this morning about the TED spread, which measures the difference between three month U.S. Treasuries contract and three month Libor, as it has widened further to 3.13% (Bloomberg is reporting this is the highest since at least 1984). The widening of the TED Spread indicates that banks are still less willing to lend for a longer time period. The dollar has also weakened on this news... Another factor playing into today's market is the SEC's new rules to protect against naked shorting, which have gone into effect today. The SEC enacted these rules out of concern about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by "naked" short selling. The new rules include the following: 1) a penalty on any participant of a registered clearing agency, and any broker-dealer from which it receives trades for clearance and settlement, for having a fail to deliver position at a registered clearing agency in any equity security; 2) elimination of the options market maker exception from Regulation SHO's close-out requirement; and 3) a "naked" short selling antifraud rule... Dow futures are +94 pts, S&P futures are now +14 pts, Nasdaq +20.

RCM Comment: Major Gold Bullish Signal

The following story is a major bullish sign for the price of gold. The Fed is in essence monetizing bad debt and the NY Fed needs a lot more money to continue the monetization. This will ultimately devalue the US$ in a major way. Written @ 10:00 today

Update as of 5:19pm: Gold was up $87 today so I guess "major bullish sign" was an understatement : )

Details of Treasury's supplementary financing program
As mentioned at 10:00, the Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio. The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives. Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules. Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.

9/16T8:18 News & Notes

News:

Lending among banks freezes - WSJ
WSJ reports banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday, threatening to spread the troubles of American International Group and Lehman Brothers to a broad range of financial institutions and the global economy. The breakdown came despite efforts by central bankers to keep money flowing. Central banks in the U.S., Europe and Japan pumped tens of billions of dollars each into the banking system. The Federal Reserve, while declining to lower its benchmark interest rate at a regular meeting Tuesday, said it will "act as needed" to combat ills including tight credit and the still-declining housing market. In one stark sign of waning confidence, the overnight London interbank offered rate, or Libor, a benchmark reflecting the rates at which banks lend to one another, more than doubled, in its sharpest spike on record. Longer-term Libor rates also rose sharply. If sustained, that move will push up payments on billions of dollars in mortgages and corporate loans that are linked to Libor. RCM Comment: This is a great gauge of the real problem. As long as LIBOR keeps moving higher and banks won't lend to each other this financial crisis will continue.

AIG American Intl: Details of Fed loan to AIG & U.S. govt's 80% equity interest in co (3.75 ) -Update-
Last night the Federal Reserve Board, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 bln to AIG under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers. The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance. The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 bln under the facility. The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders... AIG subsequently issued a statement saying its "Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG"... AIG stock is trading down 32% in pre-mkt trading, currently at $2.51.

Banks, lawmaker push SEC to curb illegal shorting - Reuters.com
Reuters.com reports a U.S. banking group is pressing securities regulators to clamp down on illegal short-selling after weeks of heavy selling pressure on shares of financial companies. The American Bankers Association said many of its members have seen precipitous declines in their stock, high trading volumes and huge spikes in so-called failures to deliver, leading them to conclude that their stock is being manipulated. The SEC expects to issue new rules against abusive short selling within 24 hours, an SEC spokesman said late Tuesday. However, the banking association said it feared the steps would not be enough. "We are concerned that the commission's forthcoming action will not go far enough to protect banks and bank holding companies from these abusive and manipulative practices," the ABA said in a letter to banking regulators. RCM Comment: This action helped add fuel to the last rally in the middle of July. Will it work this time?

RSX Russian markets halted as emergency funding fails to halt rout - Bloomberg.com (28.11 )
Bloomberg.com reports Russian mkts stopped trading for a second day after emergency funding measures by the govt failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago. The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6% gain and plunged as much as 10% within an hour. The benchmark fell 17% yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar-denominated RTS halted trading after similar declines. The govt yesterday injected $20 bln into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08%. The Finance Ministry attempted to stop the selloff by offering 1.13 trln rubles ($44 bln) of budget funds to the country's three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it's in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.
RCM Comment: This is one of the reasons for the massive repatriation going on and the subsequent US$ rally.

9/16T8:31 News and Notes

News:

GS Goldman Sachs beats by $0.10, misses on revs (135.50 )
Reports Q3 (Aug) earnings of $1.81 per share, $0.10 better than the First Call consensus of $1.71; revenues fell 35.9% year/year to $6.04 bln vs the $6.23 bln consensus. Annualized return on average tangible common shareholders' equity was 8.8% for the third quarter of 2008 and 16.3% for the first nine months of 2008. Annualized return on average common shareholders' equity was 7.7% for the third quarter of 2008 and 14.2% for the first nine months of 2008. Book value per common share increased 2% during the quarter to $99.30. The firm's Tier 1 Ratio was 11.6% at the end of the quarter. "This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations... Despite the deteriorating market conditions, the focus of our people and strength and breadth of our client franchise produced a solid performance in a tough environment. We remain well-positioned to meet the needs of our clients and identify and act on the right market opportunities." The firm repurchased 1.5 mln shares of its common stock at an average cost per share of $180.07, for a total cost of $271 mln during the quarter. The remaining share authorization under the firm's existing share repurchase program is 60.9 mln shares. Stock is trading at 128.39 in pre-mkt following earnings.

BBY Best Buy misses by $0.09, beats on revs; guides FY09 revs in-line (43.70 )
Reports Q2 (Aug) earnings of $0.48 per share, $0.09 worse than the First Call consensus of $0.57; revenues rose 12.0% year/year to $9.8 bln vs the $9.67 bln consensus. Co issues guidance for FY09, sees EPS of $3.25-3.40, may not be comparable to $3.28 consensus; sees FY09 revs of $47000 vs. $44.72 bln consensus. The combined effect of the NAPS acquisition and the share repurchase suspension is annual earnings dilution of 2 cents per share. This estimate is below prior guidance as the company has now completed the phasing of operating plans for Best Buy Europe and updated its estimates for the purchase accounting of amortization of intangible assets. The revenue increase reflected the net addition of 156 new stores in the past 12 months, a comparable store sales gain of 4.2 percent and the favorable impact of foreign currency fluctuations. The company now expects a comparable store sales gain for fiscal 2009 in the upper half of its previously disclosed range of 1 percent to 3 percent.

U.S. Federal funds in market trade at 3.0%, above 2% target rate the Fed sets

Central banks add more liquidity to markets - WSJ
WSJ reports central banks around the world pumped short-term cash into strained money markets for the second day in a row Tuesday as markets reeled amid a fast-moving crisis that is reshaping the contours of the global financial system. With interest rates on the overnight loans banks make to one another rising sharply on market unease, European policy makers boosted the amount of funds on offer. The European Central Bank injected €70 billion ($100.17 billion) in one-day funds into euro-zone money markets, more than double its Monday injection of €30 billion. The Bank of England offered 20 bln pounds ($36.05 billion) in extra two-day funds, atop Monday's 5 billion pounds in extra three-day funds. The Swiss National Bank also made extra overnight funds available, but a spokesperson declined to say how much. The Bank of Japan injected 2.5 trillion yen ($23.84 billion) into Japanese money markets in two separate operations. Demand surged as commercial banks scrambled for short-term cash. Bids from 56 financial institutions totaled more than €102 billion in the ECB's auction, which set the central bank's policy rate of 4.25% as the minimum bid rate. The Bank of England said bids totaled 58.1 billion pounds, more than triple the 20 billion pounds on offer.

GS Goldman Sachs: 5-year credit default swaps jump 105 basis points wider to 455 bps,

9/15T8:46 News and Notes

RCM Comments:

I'm not going to post the obvious news today. You can read it all over the web that Lehman Bros. is filing chapter 11 and the board of BAC has proposed the acquisition of MER. We will just have to wait an see if the shareholders are dumb enough to approved the deal. Don't forget this is the same board that eagerly proposed buying Countrywide Financial only a few months ago and that has been an albatross around the neck of BAC.

NEWS:

China cuts 1-year lending rate; reduces lending curb - Bloomberg.com
Bloomberg.com reports China cut interest rates for the first time in six years and reduced the amount of cash that some banks are required to set aside after economic growth slowed and amid tumult on Wall Street. The People's Bank of China cut the one-year lending rate to 7.20% from 7.47%, effective tomorrow, and lowered the reserve ratio by 1% point at some banks. The changes were in a statement on the central bank's Web site today. Cooling inflation has given the central bank more room to move, while global financial turmoil adds to the risk of bigger slowdowns in China's export markets. Policy makers want to protect jobs and prevent a slump in the world's fourth-biggest economy after four quarters of slowing growth.

Fed expands lending facilities in bid for stability - WSJ
The Wall Street Journal reports the Federal Reserve will expand its lending facilities in the wake of the likely demise of Lehman Brothers (LEH), taking a wider array of securities, including equities, as collateral for its loans, the central bank said late Sunday. After the collapse of Bear Stearns in March, the Fed said it would make short-term emergency loans to investment banks under a lending facility called the Primary Dealer Credit Facility. Late Sunday, the Fed said it would take a broader array of collateral from firms for the facility, including equities. Another facility, in which firms can swap risky securities for safe Treasury bonds, was also expanded. As of Wednesday, no firms had used the primary facility since July. But amidst the uncertainty created by the likely demise of Lehman Brothers and the deal for Merrill Lynch (MER) by Bank of America (BAC), there could be a rush to borrow from the Fed as trading resumes Monday. Bankers say the unwinding of Lehman Brothers' many trading positions could create a large need for short-term funds.

Emergency trading session aims to limit damage - Financial Times
Financial Times reports Wall Street dealers held an unprecedented emergency trading session yesterday afternoon in a frantic effort to prepare for the possible bankruptcy of Lehman Brothers (LEH) and limit the knock-on losses of its collapse on other financial institutions. After meetings with New York's Federal Reserve that ended in the early hours of Sunday, dealers decided to hold the special session so they could take on new positions offsetting the risks from derivatives trades they have with Lehman. The special afternoon trading session was scheduled to last two hours but was extended to four so banks could hedge in case Lehman filed for bankruptcy later in the day. The trades covered credit derivatives as well as other parts of the over-the-counter derivatives market. The contracts were due to expire at midnight last night if Lehman did not file for bankruptcy. The International Swaps and Derivatives Association said the trading was for "risk reduction" and would involve credit, equity, interest rate, foreign exchange and commodity derivatives. According to one industry executive briefed on events, meetings were held at the Fed until the early hours of yesterday morning to discuss steps the derivatives market should take to limit the damage of a default of Lehman. Talks resumed later in the day amid uncertainty on whether Lehman would find a buyer.

Full Consortium of commercial and investment banks takes series of actions to help enhance liquidity and mitigate volatility in capital markets
A group of commercial and investment banks, including Bank of America (BAC), Barclays (BCS), Citibank (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), JP Morgan (JPM), Merrill Lynch (MER), Morgan Stanley (MS), and UBS (UBS), initiate a series of actions to help enhance liquidity and mitigate the volatility and other challenges affecting global equity and debt markets. Specifically, the banks are working together to do the following: First, to assist in maximizing market liquidity through their mutual commitment to their ongoing trading relationships, dealer credit terms and capital committed to markets. Second, to establish a collateralized borrowing facility, which ten banks (Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, and UBS) have committed to fund for $7 bln each ($70 bln in total). The facility will be available to these participating institutions for liquidity up to a maximum of one third of the facility for any one bank. It is anticipated that the size of the facility may increase as other banks are permitted to join the facility. Third, to help facilitate an orderly resolution of OTC derivatives exposures between Lehman Brothers and its counterparties. This effort included opening the OTC derivatives market for trading Sunday afternoon

RCM Comment:

In the midst of all the Financial news today a couple of economic numbers have come out that show a real slowdown and recession is upon us, but of course the news is not being spoken of anywhere this morning. What a great day for the government to release terrible economic news, nobody is listening.
ECONX August Industrial Production -1.1% vs -0.3% consensus; Capacity Utilization 78.7% vs 79.6% consensus
ECONX September Empire Manufacturing -7.4 vs 1.0 consensus

9/11T9:09 News & Notes

LEH Lehman Brothers' biggest problem -- its high exposure to commercial real-estate holdings -- hasn't been solved - WSJ (7.25 ) -Update-
WSJ reports the co's biggest problem -- its high exposure to commercial real-estate holdings -- hasn't been solved. Investors would have cheered Lehman's restructuring plans, announced Wednesday, if the bank had reported a sharp drop in its commercial real-estate holdings. But the decline was a modest $7.2 billion, leaving $32.6 billion on its balance sheet at the close of its fiscal third quarter ended Aug. 31. The commercial real-estate holdings unnerve investors because they dominate Lehman's balance sheet. They still are 1.7 times as big as the bank's common equity of $19.5 billion. In addition, there is uncertainty about the value Lehman has placed on these assets. That uncertainty could intensify in light of what Lehman intends to do with its commercial real estate. The firm plans to spin off these assets into a separate company owned by Lehman shareholders in its fiscal first quarter of 2009. Notably, the new entity won't use market values for the assets it holds.

Israel asks U.S. for arms, air corridor to attack Iran - Haaretz.com
Haaretz.com reports the security aid package the United States has refused to give Israel for the past few months out of concern that Israel would use it to attack nuclear facilities in Iran included a large number of "bunker-buster" bombs, permission to use an air corridor to Iran, an advanced technological system and refueling planes. Officials from both countries have been discussing the Israeli requests over the past few months. Their rejection would make it very difficult for Israel to attack Iran, if such a decision is made.

Insurers and banks face huge CDS losses - FT
FT reports the default of up to $500 bln of Fannie Mae and Freddie Mac credit derivatives contracts triggered by the US government's seizure of the mortgage groups could result in billions of dollars of losses for insurance companies and banks who offered credit insurance in recent months. The potential losses, as well as uncertainty about exactly how the derivatives contracts will be settled and unwound, is putting strains on the unregulated $62,000 bln credit derivatives market, which has been a target of regulators worried about the hidden risks it could hold for the financial system. The exact number of credit default swaps -- a kind of insurance against debt default -- outstanding on Fannie Mae and Freddie Mac are not known, reflecting the private nature of the sector. However, according to the latest estimates from dealers and analysts, there could up to $500 bln of contracts outstanding. Michael Hampden-Turner, credit strategist at Citigroup in London, estimates there are $200-$500 bln of outstanding CDS and other credit derivatives referencing Fannie and Freddie. This would make their default the biggest the market has encountered. The previous record was held by Delphi, the US carparts maker that went bankrupt in 2005 and which had about $25 bln of CDS.

Fed may expand funding aid to banks in a 'mother of year-ends' - Bloomberg.com
Bloomberg.com reports the Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year. Six bank failures in the past two months and rising concern about Lehman Brothers Holdings (LEH)'s capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end. "This could be the mother of year-ends,'' said Brian Sack, vice president of Macroeconomic Advisers, who used to serve as head of monetary and financial market analysis at the Fed. "The markets will need extraordinary actions to get through it.'' One option is for banks and brokers to increase the loans they take out directly with the Fed; the central bank reports on the figures today. Officials could also offer options on its biweekly loan auctions or introduce special repurchase agreements to straddle the end of the year, economists said.

SpendingPulse says U.S. ex-car retail sales growth slows - Reuters.com
Reuters.com reports U.S. retail sales excluding cars rose in August but at a slower pace, as high gasoline and food prices cut into spending on other goods and services, a private report released on Thursday showed. Consumer spending without autos rose 0.4% last month on a seasonally adjusted basis, less than the 1% increase in July, said SpendingPulse, the retail data service of MasterCard Advisors, an arm of MasterCard Worldwide (MA). "People are focusing on the essentials which are going up and up," said Kamalesh Rao, director of economic research at MasterCard Advisors. This attention to household staples had caused shoppers to pare back on items such as clothes and consumer electronics, which typically enjoy sales bumps in late summer as students return to school. "It was probably a disappointing back-to-school season," Rao said.

King says BOE can't give banks long-term help, points to Brown - Bloomberg.com
Bloomberg.com reports Bank of England Governor Mervyn King said its planned money-market reforms won't provide long- term assistance to banks to unfreeze lending and any decision on the matter should be left to Prime Minister Gordon Brown. The central bank "will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending'' over the long term, King told lawmakers in London today. "Only private savers or taxpayers via the government can provide such funds.'' King's central bank will next week unveil proposals to revamp its money-market operations to better cope with financial- market turmoil. With Brown under pressure to ease the U.K.'s house-price slump, King is distancing the central bank from any plan to prop up the country's mortgage market with public funds.

Junk bond distress levels surge, signaling defaults - Bloomberg.com
Bloomberg.com reports more than 30% of European high-risk, high-yield bonds are trading at distressed levels, the most in five years, stoking speculation defaults will rise. Investors demand an extra yield over government debt of more than 10%age points to hold 53 of the 169 bonds in Merrill Lynch's Euro High Yield Constrained Index. That's the biggest proportion of distressed debt since March 2003, in the aftermath of the Sept. 11 terror attacks and the dot-com crisis. "Typically, those levels of distress would indicate that defaults are going to rise,'' said Karl Bergqwist, who manages the equivalent of about $500 mln in high-yield debt at Gartmore Investment Management in London. "We think there's much worse to come. Spreads could go a lot wider and defaults are undoubtedly going to go up.'' Defaults on European speculative-grade corporate bonds will climb to 2.3% in a year, from 0.7% now, near a record low, Moody's Investors Service said. Worldwide defaults will surge to 7.4%, from 2.7%. Spreads on high-yield debt have widened as investors, fleeing the fallout from the collapse of the U.S. subprime-mortgage market, shun all but the safest bonds and as banks tighten lending standards.