The market is hanging on to every gesture made by the FED right now and like my earlier post pointed out a Fed Funds Rate cut is not going to solve the problem of trillions of dollars of opaque CDO tranches that need to be re-priced. The entire problem with the credit markets is simply not knowing how much bad paper is out there and who holds it. A 25 to 50 basis point drop followed by several drops will merely be symbolic much as the 50 basis pt drop in the discount window is symbolic. Lou Barnes put out a suggestion the other day that I though made alot of sense
“Some how, some way, these tranches, all five or ten trillion dollars-worth, must be re-underwritten, re-rated, or evaluated and guaranteed in some form. Until then, the owners and the owners’ bankers are impaired or imperiled, and worse — much worse — cannot buy new IOUs, the cause of our current mortgage starvation.
Big talk, huh? How are you gonna do that? A bailout?
It’s been done before. In my ill-spent youth, I and many others were sent to S&Ls 1985-87 by regulators to value loan portfolios. One senior consultant, two staff, a billion-dollar S&L, no great precision, just “get close” — in three weeks, we knew.
Before deploying a new army like that one, we have to find the deals. All of them: their hidden and scattered status is part of this problem. To do that, wake up the Fed. I don’t know if we need electrodes or explosives to get Mr. Bernanke into the real world, but once he’s here this job is a snap. In the old days, one of the most feared events on Wall Street was an “information call” from the Fed.
Don’t want to talk? Stonewall with privacy concerns and legalisms? This was the logjam breaker: “If you will not assist us, we will advise our member banks that your firm presents a hazard to the system, and your access to the system will close. Today.”
The investment banks and rating agencies have the records of the derivatives. They are not the White House, after all. Google has the phone numbers. This credit crunch is a flat-out emergency, and it’s time the authorities acted accordingly.”
It sounds to me like the FED has the power to call out the hedge funds and force them to show their hands. Once we identify the amount of the bad debt and where it is the credit market will stabilize. Once the info becomes known there may be a bloodletting in the market but it will be swift and we can rebuild much like the 1987 crash. This way we avoid a moral hazard of a multiple rate cuts and future bubble, the holders of the bad debt will be punished not bailed out, the housing market will correct accordingly and we free the good credit from the bad credit. That makes sense to me.
