主题：【讨论】“六个月之后不会再有投行存在了”。 -- 厚积薄发

Now that the collapse of Lehman is leading to the risk of the generalized run on the shadow banking system (the other independent broker dealers, the broker dealers that are part of larger commercial banks such as Citi and JPMorgan, hedge funds, private equity funds, the remaining SIVs and conduits, money market funds, other smaller broker dealers) the policy reaction is to try to build a new set of levies while the financial perfect storm of the century has destroyed the first sets of levies. This reaction includes the following steps.

First, the Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities.

Second, the Fed is waving Section 23A of the Federal Reserve Act that restricts how much commercial banks can relend liquidity to their investment banking affiliates; these restrictions are sensible prudential rules aimed at avoiding banks to subsidize their broker dealer affiliates with deposit-insured deposit. Now these sensible prudential regulations are thrown to the wind; so Citi, JPMorgan and Bank of America can happily use or raid their FDIC-insured deposit to support their bankrupt broker dealer operations. This is reckless as abuse of this new form of subsidization of near insolvent broker dealers with commercial banking deposits may eventually impair the viability and solvency of their commercial banking regulation. This is a form of connected lending that eventually led to the Japanese financial crisis and their severe banking crisis. This process of raiding FDIC insured deposits already started in 2007 when the Fed waived Regulation W for Citigroup and Bank of America when the unraveling of their toxic SIVs and conduits occurred with the roll-off of the ABCP paper. So, now all banks – not just two – can happily raid their deposits to save their broker dealers operations where funding mostly occurs with unstable reckless overnight repos. This desperate policy action shows that even the broker dealers arms of non-independent broker dealers (Citi, JPM, BofA) are now at the risk of a run on their overnight liabilities.

Third, an attempt to bail-in the private sector and provide a private lender of last resort support of the financial system is at work: ten major global banks will each fork $7 billion to create a $70 billion fund; each of these firms could borrow up to a third of such fund or $23 billion. But this private lender of last resort (LOLR) facility will not work since if any firm were to access this facility in case of a run on its liabilities panic will ensue – as the use of it will signal severe trouble - and the run will continue. The IMF created a similar facility to deal with liquidity runs on sound and solvent but illiquid countries; but no country ever used or even signed up for such facility as it would have been associated with “stigma”. Also such private LOLR facilities need to come with rules on their use (“conditionality”); otherwise an illiquid and insolvent broker dealer could access the facility with no restrictions and bankrupt the fund and the other members of the fund. But the new facility apparently does not come with any conditionality; so it is flawed in its design.

Fourth, since Lehman is bust the new line of defense was the takeover of Merrill by BofA. After taking over the insolvent Countrywide now Ken Lewis is making another reckless gamble by taking over at a vastly inflated price another distressed broker dealer. This is dangerous behavior for BofA. The lesson for Mack of Morgan Stanley and Blankfein of Goldman is that they should find a buyer today. After the collapse in six months of three major broker dealers Morgan Stanley and Goldman will be next unless they find a large financial institution with a large commercial bank that provides stable FDIC-insured deposits. As predicted here months ago no independent broker dealer will survive.

Fifth, the Fed may cut the Fed Funds rate and discount rate today. But this policy rate cut will make no difference to the fundamental solvency and credit problems of the economy. The economy does not suffer only of illiquidity; more seriously it suffers of severe credit and solvency problems that the Fed cannot address in any way.

Therefore any rally from Fed actions today will be short lived. When Bear was rescued the financial market rally lasted two months; when in July the Fannie and Freddie legislation was proposed the rally lasted a few weeks; when the actual nationalization of Fannie and Freddie occurred a week ago the rally lasted only one day. The ability of policy authorities to prop financial markets is rapidly eroding as market participants perceive that policy makers are desperate and running out of options. At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial and economic train wreck.

PBS (Sept 15, 2008): Uncertainty Hits Wall Street After Lehman, Merrill Meltdown ([URL=http://www.pbs.org/newshour/video/module.html?mod=0&pkg=15092008&seg=2

]click for video[/URL])

Bloomberg (Sept 15, 2008): Reshaping Wall Street (click for video)

Charlie Rose (Sept. 15, 2008): A discussion about the crisis on Wall Street (click for video)

Advisor Perspectives: Our Interview with Nouriel Roubini