"Unprecedented in modern times"

Good morning. Did you ever have a favorite little restaurant that was suddenly discovered and then overrun with new customers, and it was no longer your own little place any more? That's what has happened to the story of the housing bubble. It no longer belongs to housing. It has morphed into a bigger, more ominous story involving the health of the nation's largest financial institutions.

Today the Federal Reserve tried something new and different: "In a statement timed to occur before the start of trading in New York, the Fed said it planned to offer $40 billion in emergency funds to banks next week through an auction process."

Observed economist Ian Shepherdson, "Clearly, the Fed is feeling its way in the dark here. Current conditions are unprecedented in modern times."

Alarmist? Maybe. But fear at the Fed is not a good thing, and that is the headline on this item from Floyd Norris at NYTimes.com today: "The combined actions of the world’s central banks on Wednesday smacks of a real fear that the world’s financial system is in trouble."

A year ago, a large financial institution in trouble -- say Countrywide Financial, or Washington Mutual, which both happen to be in trouble -- would set off gleeful speculation about huge mergers. Today the list of potential buyers is suddenly very short. Bank of America as a buyer?  Gee, do you think Bank of America shareholders are happy with the $2 billion they already invested in Countrywide?

Your thoughts? Comments? Email story tips to peter.viles@latimes.com.

Comments

[Cal]

A bank cant hold more than 10% of all US deposits, BofA cant buy CFC for that reason alone.

Well, they would have to divest themselves of the bank part of CFC if they did and the bank is the main part of their origination business now.

Realistically, CFC would need a foreign buyer to survive.

[davin]

Has anyone noticed the bankruptcy cramdown bill that was approved by a House subcommittee today?

[Michael Snyder]

I posted this under "What the Fed Said" earlier today, but it seems to be most appropriate here.

The market opened with a 200 point rebound this morning based in the Fed's agreement with European banks.and has been on a steady slide ever since. Now, twenty minutes before the closing bell it's down 64 points on the day.
It's important to realize the "sub prime" title is a smoke screen for the real issue. With a total of $46 billion in bad credit write downs industry wide and counting, there is no way to keep pointing the finger at homeowners as the cause of this mess.
A series of three interest rate reductions by the Fed have done nothing to stem the tide of financial collapse, yet Wall St. keeps bouncing on every rumor and loosing every gain.
The problem here is the way these loans were packaged, sold and then leveraged by investors seeking shelter in oil and other commodities. With their dream of $100 dollar per barrel oil in tatters, these highly leveraged investors must come up with margin calls on the oil the bought at $98 last month that sold for $89 yesterday. (Today its' up over $4 as the dollar slides against the Euro.)
Meanwhile these over leveraged investors need to get a loan; hence the sudden largess on the part of international bankers who need to back their own bad bets.
The net result of all this maneuvering at the consumer level is a net zero. Consumer spending driven by credit which is largely backed by housing values is the real engine of our economy. And that credit is tighter than ever. Underwriters are sending appraisers to the same property multiple times before they'll release loan docs, and the retail numbers are looking grim this Christmas. In the time it's taken me to write this, the DJIA has fallen another 20 points, (about 1.5 a minute). It'll be interesting to watch and see what Fund managers do to prop up their books for those fourth quarter bonuses, but whatever it is, the real proof of our situation will be clear come mid January.

[Hula Girl]

Just seems like throwing more darts at the economic dartboard. ...

[l.a.guy]

This just in... DOW closes up 41.13 / S&P 500 up 8.94.

Armageddon put off for one more day.

[anon1137]

credit crunch, credit crunch, credit crunch . . .

THEN WHY ARE INTEREST RATES SO LOW?

[TakeFive]

"Did you ever have a favorite little restaurant that was suddenly discovered and then overrun with new customers, and it was no longer your own little place any more? That's what has happened to the story of the housing bubble. "

It's only took 6 months for the MSM to find the resturant this time.

"Gee, do you think Bank of America shareholders are happy with the $2 billion they already invested in Countrywide?"

I'd say their downright giddy compared to the shareholders at IndyMac:

http://finance.google.com/finance?q=imb

[Ann]

Actually the word that immediately came to mind for me whenI saw that news earlier today was PANIC.

And panic comes after fear and is when all rational thought flies out the window and lifelines are sought without rhyme or reason or plan.

[Horizontal Translation]

How'd we miss this cheery analysis? (La Times Op-Ed)

http://tinyurl.com/29wpfq

[Tombstone Realty]

Oh, I've been really scared of the state of the financial system for awhile now. Sure housing is the most public element of this debacle, but there are all sorts of packaged commodities being sold on the market, owned by banks, involving packaged credit card debt, etc., and ALL of it is off the books.

I'm used to the government running up Costs Invisible, but when the banks follow suit, not just here in the States, but abroad as well - we're looking at a banking smackdown.

Damn right Bernanke is scared. This is what, the tenth? eleventh? cash infusion into the market? All of it chasing a declining yield on stocks that they are trying to uphold, but instead are scaring buyers away from.

The banking system is screwed. Even more screwed than MLB, I'm so sure.

[vultur]

If the financial sector is in such turmoil and the fate of our properly functioning bank system is at stake how are housing still selling for nearly $500,000 in the Los Angeles area and how has the stock market managed to hold up so well?

Either the panic is way overblown or we're at the edge of a cliff.

[Horizontal Translation]

Here's some int'l perspective from BBC today:

"Many economists believe that the crisis is also an opportunity for rebalancing the economy, which has become overly dependent on consumer spending financed by cheap credit and government borrowing.

An increase in household savings, encouraged by higher interest rates for savers, could lead to more long-term investment.

And a mild economic slowdown in the US, coupled with a gradual reduction in the value of the dollar, could help rebalance the world economy, which has become overly dependent on the US as the engine of world economic growth."