Friday, March 7, 2008
Time For Rate Cuts - Again
Here we go again. Time for the ol Fed to crank up the engine and slash another 50 basis points. As I said here, the markets are sick - like a junkie. One fix is good for a couple of weeks, and then the bells start ringing again. The culprit this time is the failure of both the Carlyle Group and Thorburg Mortgage failing to meet margin calls.
Bloomberg reports that the Carlyle Capital yesterday failed to meet margin calls, prompting creditors to seek immediate repayment. mortgage-bond fund was suspended in Amsterdam trading after creditors forced the sale of some holdings, jeopardizing shareholders' capital.
Lenders who issued default notices have liquidated some residential mortgage-backed securities held by the fund and may sell more as talks continue.
And here's Businessweek on Thornburg Mortgage's woes. Credit rating agency Moody's Investors Service on Thursday evening downgraded mortgage lender and real estate investment trust Thornburg Mortgage Inc. because of multiple defaults on financing agreements. Moody's cut Thornburg's senior unsecured debt rating to "Ca" from "Caa2" and its preferred stock ratings to "C" from "Ca." All four ratings are considered junk status. The unsecured debt rating is still on review for another possible downgrade. Thornburg disclosed Wednesday evening that JPMorgan Chase & Co. issued a default notice after Thornburg failed to meet a $28 million margin call. That notice triggered cross-defaults on agreements Thornburg had with other lenders.
The Wall Street Journal goes one step further and says that a lotta hedge funds are in trouble and being squeezed by lenders. The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets. This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and lenders feel compelled to make further demands, or "margin calls," which cause even more selling.
And to add fuel to the fire, the February payroll showed a deep malaise, with 63,000 jobs lost and a decline in the jobless rate of 4.8 percent, which put together basically means that people lost jobs and have given up searching for new ones.
So here we are again. Near panic, the Dow crashing, bad news piling up and everyone is literally begging for a rate cut. Nothing much the Fed can do at this stage, accept comply and give them the fix. 50 basis points would be realistic, and if Bernanke is feeling very generous, maybe even 75. And you can expect it next week. For sure. You want it in writing? This is writing, albeit digital.
Bloomberg reports that the Carlyle Capital yesterday failed to meet margin calls, prompting creditors to seek immediate repayment. mortgage-bond fund was suspended in Amsterdam trading after creditors forced the sale of some holdings, jeopardizing shareholders' capital.
Lenders who issued default notices have liquidated some residential mortgage-backed securities held by the fund and may sell more as talks continue.
And here's Businessweek on Thornburg Mortgage's woes. Credit rating agency Moody's Investors Service on Thursday evening downgraded mortgage lender and real estate investment trust Thornburg Mortgage Inc. because of multiple defaults on financing agreements. Moody's cut Thornburg's senior unsecured debt rating to "Ca" from "Caa2" and its preferred stock ratings to "C" from "Ca." All four ratings are considered junk status. The unsecured debt rating is still on review for another possible downgrade. Thornburg disclosed Wednesday evening that JPMorgan Chase & Co. issued a default notice after Thornburg failed to meet a $28 million margin call. That notice triggered cross-defaults on agreements Thornburg had with other lenders.
The Wall Street Journal goes one step further and says that a lotta hedge funds are in trouble and being squeezed by lenders. The financial turmoil is taking on a new dimension: Banks that lent money to hedge funds and other big risk-takers are asking for some of it back. Loans from banks and brokerages had allowed hedge funds, which manage some $1.9 trillion in clients' money, to amass many times that amount in investments. But as the value of mortgage-backed bonds and other investments has dropped in recent weeks, the lenders are demanding that borrowers put up more cash or assets. This is producing a negative cycle that has policy makers deeply worried. When investors rush to dump assets, prices fall and lenders feel compelled to make further demands, or "margin calls," which cause even more selling.
And to add fuel to the fire, the February payroll showed a deep malaise, with 63,000 jobs lost and a decline in the jobless rate of 4.8 percent, which put together basically means that people lost jobs and have given up searching for new ones.
So here we are again. Near panic, the Dow crashing, bad news piling up and everyone is literally begging for a rate cut. Nothing much the Fed can do at this stage, accept comply and give them the fix. 50 basis points would be realistic, and if Bernanke is feeling very generous, maybe even 75. And you can expect it next week. For sure. You want it in writing? This is writing, albeit digital.
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