For Whom the Bell Tolls

Posted November 24, 2008

The new US Treasury Secretary name was announced by President-elect Obama to the relief of financial markets. The US is planning on flooding global markets with US currency.

 

US President-elect Barack Obama has been pressured to announce his pick for Treasury Secretary.  Obama wanted to wait until after the Thanksgiving holiday to supply a name, but the world markets are seeking signs of financial stability and a clue as to what the future holds in the way of policy.  The smooth transition of power which the US has always been noted for after an election has never been more important than it is now.  The nervous financial markets still continue to remain poised for collapse at signs current policies are not working. 

Obama has picked Timothy Geithner to be his Treasury Secretary.  Geithner is currently the president of the New York Federal Reserve.  

The US steps taken so far may have managed to stop a complete collapse of financial markets, but they have failed to restore any real stability.  The wide swings in equity values continue from day to day while banks quietly fail.  In fact, nonperforming loans become the death toll for 3 US banks last week – 2 in California and 1 in Georgia.  The deposit accounts were quickly taken over by larger banks, but it is interesting that bank failures are largely kept quiet except for banking giants like Citigroup.  

Citigroup became the newest global banking system to require additional federal assistance as its stock prices fell below $4 last week.  Citigroup is a massive company with extensive global connections, and its collapse would reverberate throughout both developed and emerging markets.  The situation was critical enough to lead to an emergency weekend meeting of the US Treasury Department, the Federal Deposit Insurance Corp. and the Federal Reserve to discuss how to structure another corporate bailout. 

Right now when the bell tolls, it can mean financial failure of a magnitude which freezes markets on both the lending and borrowing sides.  That kind of reverberation could send shaky markets into a quick tailspin. 

The Citigroup bailout will involve the injection of $20 billion by the Feds into the company.  The Treasury Department and the FDIC are also willing to guarantee up to $306 billion of toxic assets on the books of Citigroup.  Any cash requirements on the part of the Feds under this plan will come from the original $700 billion bailout package passed by the US Congress. 

One of the reasons this particular bailout is noteworthy is because Citigroup must take action to help prevent foreclosures.  This has been a point of contention between the US Congress and Treasury Secretary Paulsen.  Paulsen has refused to use any of the bailout money to assist with mortgage failures.  

By the way, Paulsen is now saying he may want to ask Congress for the remaining $350 billion of the original TARP program in order to more aggressively address the global financial market problems between now and when Obama takes office in January. 

Hmmm…wonder what brought on this sudden change of heart after he publicly fought with Congress about the use of Federal funds to address economic stability?  Do you think the fact many of the actions to date have failed to bring about financial market stability might have something to do with it? 

The Dow Jones Industrial Average did recover a bit on Friday, 21/November/2008, by closing at 8,046.42.  The market was still down 450.89 points for the week though.  The FTSE closed at 3,780.96 or down 434.27 for the week.  The NEKKEI closed at 7,910.79 or 641.79 points down since last Monday.  All in all it was not a good week for equity markets. 

In the currency markets there is a lot of activity than may have far reaching long term consequences.  This bell is tolling and the sound waves are rolling across the global economies.  The US Treasury department is poised to pump US currency on a massive scale into the world's financial systems.  Since credit markets remain frozen and global recessions are continuing to deepen, the need for stable currency to back up lending efforts has become apparent.  

Since the start of the mortgage meltdown two months ago, the US dollar has strengthened significantly against the euro – by 17% to be exact.  On a day to day basis, the dollar has been alternating between strengthening and weakening.  Yesterday, 23/November/2008, in terms of US dollars, the euro had strengthened to $1.2589; the British pound to $1.4917; the Canadian dollar to $.7831; the Australian dollar to $.63314; the New Zealand dollar to $.5385; and the Swiss franc to $.8182.  The Japanese yen, on the other hand, weakened to $.01039. 

If the financial markets were a bell tower, the bell ringer would be working full time.  In the old days, the sound of the bell tolling indicated something drastic such as the death of an important person or an impending natural disaster.  Given the condition of the financial markets, the bell would never stop ringing right now as investors stay on alert for the next crisis. 

The question is: What company or country is the bell tolling for right now?

 

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