Monday, March 31, 2008

Fed eyes Nordic-style nationalisation of US banks. AND The Fed Needs to BUY Mortgage Collateral, Outright: Pimco

Two threads of the same tapestry.
Our regular readers know the Fed usually lends against high quality collateral, has recently expanded their definition of 'high-quality' and has had the option of outright purchases in their bag of tricks. It's a bit unsettling to see PIMCO calling for what the cognesceti call "Extraordinary Actions".

Mr. Evans-Pritchard can be a bit alarmist but we've found his reporting to be accurate enough that we've been linking to him for a year.
From The Telegraph:

The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.

The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options....MORE

...Q: We have seen the significant Fed easing that you expected at the December Cyclical Forum as well as additional credit facilities and some fiscal stimulus in the form of tax breaks. Will these responses be sufficient to contain this self-feeding process?

...So, in addition to the alternative credit facilities the Fed has recently provided, first to banks and then to broker-dealers, we expect the Fed to more aggressively use its balance sheet. They don’t just need to lend against mortgage collateral via enlarged Treasury auction facilities and term repo operations, they need to buy mortgage collateral outright. This is, at the margin, a quasi fiscal policy action, in that any losses the Fed were to take would reduce the seinorage rebates it pays the Federal government on the profits and interest generated by its portfolio. This makes it a politically difficult step for the Fed, but it is a step we think they will take, as the political climate evolves toward recognition that all tools must be employed.

HT: 1440 Wall Street who writes

...Deleveraging in the shadow bank system is leading to mispricing in high quality assets and Pimco is happy to accomodate the sellers who have no other choice.

Price discovery is a bitch, especially when your only option is to hit Bill Gross’ lowball bid.

If you are pressed for time, you can read the Cliffnotes version on Pimco’s commentary, summed up in the following sentence:
Until property deflation is stopped, nothing else is going to work in our economy.

Fair warning, reading their commentary will ruin your mood heading into the weekend.