RCM Editorial: US$ vs. Euro

Today the US$ dropped the most % wise vs. the Euro in one day since the inception of the Euro. This is further evidence that the redemption and repatriation tsunami has come to a close for the moment. Of course, it will come as no surprise that Gold and Silver are up today %4.4 & %3.25 respectively and Oil is up %9.12. We have been writing in this blog repeatedly that as soon as the tsunami subsides we will see a meaningful pick up in commodity prices. Today is just the beginning.

RCM Reprint: Monkey Business Blog

Treasury Needs $550 Billion in Fourth Quarter. Obama Endorses McCain For President!
Treasury has announced that it will need to borrow $550 billion for the quarter ending December 31, 2008. I repeat, Treasury has announced that it will need to borrow $550 billion for the quarter ending December 31, 2008. Upon hearing this, Senator Barack Obama endorsed Senator John McCain for President!
People have been asking, "Where are we going to get all this money for all these bailouts?" Here is one way. Here is the really scary part: These borrowings do not include the borrowing Treasury must do on behalf of the Fed! The Fed's balance sheet has ballooned to well over $1 trillion with the additions of its commercial paper facilities, loans to AIG, etc. Therefore, the actual money borrowed will be a lot higher.
I remember in college there was always a lot of talk of "The Crowding Out Effect". That was a theory that when the government comes in and borrows on a very significant scale, it essentially elbows all other USD borrowing (like mortgage backed securities, corporate debt, etc) out of the paint. At some point, the sheer size of net Treasury issuance (the $550 billion is a gross number) has to increase risk free (Treasury) yields and therefore, probably increase all borrowing rates substantially. Right now, there is still a very good flight to quality bid factored into Treasury yields. This issuance should eventually swamp that bid. What is going to be interesting is now that Treasury has essentially guaranteed GSE (Freddie and Fannie) debt and senior bank debt (for the first three years), Treasury will sort of be competing with themselves! I wouldn't be surprised to see our own banking system absorbing good chunks of the longer dated Treasury debt as they work to carry (the difference between the banks cost of funds and the rate on their investments) their way back to health. How perverse is that? U.S. banks will use federally guaranteed deposits and federally injected capital to buy the debt that Treasury issues....to bail the banks out in the first place!

News&Notes: TARP, GS, Private Equity, Homeowners Relief

RCM Comment: Strange world we live in...
Rescue cash lures thousands of banks - WSJ
The Wall Street Journal reports treasury and banking regulators say as many as 1,800 publicly held institutions could apply for government investments in coming weeks, out of concern that failing to do so could make them losers in a banking sector reshaped by the Treasury's $700 bln rescue plan. Depending upon conditions still being crafted by Treasury, thousands more private banks could apply for government capital as well, a Treasury spokeswoman said Sunday. Only days ago, many healthy banks were saying they didn't need taxpayer money under the Troubled Asset Relief Program. These healthy banks said they worried that taking government investments could unfairly tar them as in need of a bailout. In the past week, that perception has been reversed, due in large part to efforts by Treasury, banking lobbyists and legal advisers to sell the TARP. Now institutions across the U.S. worry that if they don't try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments. "There's a perception in the market that the government is actively picking winners and losers...we wanted it well-known in the market that we're on the list of survivors," said Roy Whitehead, chairman, president and CEO of Washington Federal (WFSL), one of about 20 regional banks approved by Treasury for the program last week.

RCM Comment: Another one bites the dust...
GS Goldman Sachs fund loses $990 mln after 10 months - FT.com (89.09 )
According to FT.com, one of Goldman Sachs‘s flagship hedge funds, run by two of the Wall Street bank's most talented traders, has lost close to $1 bln since its launch in January in further evidence of the crisis facing the industry. Goldman Sachs Investment Partners, which was hailed in Jan as one of the biggest hedge fund launches, raising more than $6 bln, has told investors that it had lost $989 mln by Sept. It said the fund was down about 13% in the third quarter. Year-to-date performance fell about 15.5% in the year to Sept. More than half of GS Investment Partners' losses in the third quarter were from its investments in commodities, basic materials, metals, mining, energy and agriculture. But like many multi-strategy funds diversified across equity, credit markets and convertible bonds, GS Investment Partners was hit hard by losses on convertible bonds -- debt instruments that can convert into equity.

Homeowners wait as relief plan drags - WSJ
WSJ reports disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush administration's last attempt to forestall sliding home prices. The White House and the FDIC are at odds over basic questions about the effort's size and breadth, several government officials said. The expectation that a new president could immediately redraw the design and scope of any plan has further delayed matters. The FDIC has been developing a proposal, which some estimate could help between two and three million homeowners, designed to encourage banks to rework troubled loans by providing a partial federal guarantee for losses on modified mortgages that meet specific criteria, people briefed on the proposal said. Under the plan, the government would cover roughly half the loss on reworked loans that went into foreclosure. The plan would use between $40 billion and $50 billion from the government's $700 billion financial-market rescue fund to create these loss-sharing agreements between banks and the government. The White House is reviewing several ideas, including a new one that would further expand the role of the U.S. Department of Housing and Urban Development. Details of that proposal couldn't be learned, but it is expected to be different from that crafted by the FDIC.

RCM Comment: Another example of the liquidity freeze...
Private equity draws the cold shoulder - WSJ
WSJ reports large institutional investors that provided much of the capital that put some of America's best-known companies into private hands are starting to cool on the investment strategy, suggesting that the lifeline for private equity is eroding. Public pension funds and endowments are turning down invitations to make private-equity investments. The nation's largest public pension fund, the California Public Employees' Retirement System, or Calpers, is asking private-equity cos to ease off on requests for additional capital it had previously committed to deliver. Calpers has $189.6 billion of assets under management. Harvard University, with an endowment of $36.9 billion under Jane Mendillo, is seeking to offload about $1.5 billion in investments with private-equity cos such as Bain Capital, according to people familiar with the situation. If the Harvard portfolio trades, the transaction would be one of the largest-ever sales of a private-equity stake. Bids are due this week.