- Joined
- 5/5/06
- Messages
- 105
- Points
- 26
No amount of financial engineering or SIVs will turn a bad loan into a good one. Sooner or later banks (or ABS investors) will have to recognize the loss — unless they can get the taxpayer to foot the bill. There are no appeals for a bailout yet, but do not be surprised to see this idea floated over the next year. The precedent was established in the 1970s and 1980s of the government stepping in to guarantee the liabilities of large entities in financial difficulty — "in the interests of preserving the stability of the financial markets and to protect the taxpayer". All losses are thereafter borne by the taxpayer (some protection!) and the banks end up making a profit where they stood to lose billions of dollars. The S&L debacle of the 1980s and 1990s, for example, cost the US taxpayer more than $500 billion according to some estimates. Ask any parent what happens if you reward bad behavior: you end up with an uncontrollable child. Little wonder that the history of financial debacles keeps on repeating itself.
The Fed keeps pumping liquidity into financial markets and commercial paper rates are settling back towards the fed funds rate. This is not the full story, however, with the 3-month treasury yield below 4.0%, signaling investors continued aversion to risk.
New issues of asset-backed and mortgage-backed securities (up to October 18) have dried up almost completely and concerned investors are unlikely to roll-over existing short-term and medium-term notes as they mature. The scramble to set up a $100 billion SIV is aimed at averting the immediate threat of banks having to take a large chunk of existing ABS funding onto their balance sheets.
The Fed will be forced to maintain a high level of liquidity over the next few months and another rate cut is likely, causing a further decline in the dollar and boosting gold and oil prices.
Gold
Gold successfully tested support at $750, confirming the long-term target of $900 [730+(730-550)]. A rise above $770 would signal another (medium-term) advance. Reversal below $725/ounce is unlikely — and would warn of another correction. Gold is expected to appreciate as the US dollar weakens.
The Fed keeps pumping liquidity into financial markets and commercial paper rates are settling back towards the fed funds rate. This is not the full story, however, with the 3-month treasury yield below 4.0%, signaling investors continued aversion to risk.
New issues of asset-backed and mortgage-backed securities (up to October 18) have dried up almost completely and concerned investors are unlikely to roll-over existing short-term and medium-term notes as they mature. The scramble to set up a $100 billion SIV is aimed at averting the immediate threat of banks having to take a large chunk of existing ABS funding onto their balance sheets.
The Fed will be forced to maintain a high level of liquidity over the next few months and another rate cut is likely, causing a further decline in the dollar and boosting gold and oil prices.
Gold
Gold successfully tested support at $750, confirming the long-term target of $900 [730+(730-550)]. A rise above $770 would signal another (medium-term) advance. Reversal below $725/ounce is unlikely — and would warn of another correction. Gold is expected to appreciate as the US dollar weakens.