Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Who needs a bailout if JP Morgan can buy WaMu? The Federal Reserve, that’s who. The dirty little secret of the bailout debate is that the US taxpasyer is already on the hook for the toxicity in the financial system by virtue of the Fed’s now-abnormal balance sheet, which has been drained away from Treasuries by the less than stellar collateral it holds in exchange for its extraordinary lending facilities to financial institutions (hard to believe JP Morgan would have done the WaMu deal and taken on WaMu’s dirty laundry without access to the Fed “window”).
All the political posturing in the halls of Congress and the media will not change the fact that without Governmental intervention as the “patient buyer” of distressed securities, the US will have no choice but to print money to bail out the Fed, if nothing else. Ironically ‘Helicopter Ben” will be the recipient of this inflationary largesse rather than the dispensory!
Meanwhile, back in the CDO market, it will be dawning on unsecured debt holders of any bank that they are not exactly sitting pretty (think Wachovia) so expect more deals to follow like WaMu (pre- or post- FDIC intervention). Ironically, all these acquisitions in distress are creating a new rank of financial institutions that are again “too big to fail”!
So far as the debate in Washington over the weekend, how ironic that we are approaching the season of the Hebraic “day of atonement”. In what is left of the securitization market (ie, credit default swaps), it is the turkeys, not the chickens, that are coming home to roost. Once every political faction has gotten a piece of the draft legislation to call its own, something big will pass. But the question will remain, is the bailout bill “too big to fail”? The signals of success will first appear in the credit markets. Probably LIBOR. Ironically, the Fed as lender to AIG will for once be hoping that the interest on its “adjustable rate” loan (8.5% above LIBOR) actually goes down.
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