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Busch: Anatomy Of A Panic And The Response

The Lehman bankruptcy sent waves of asset sales and capital raises throughout the system. One of the early casualties was the "Breaking-Of-The-Buck" at the Primary Reserve money market fund. However, there are numerous other ripples.

The Straits Times reports that some Singapore investors of a product linked to Lehman Brothers have received late-night phone calls from DBS Bank warning them that their entire stake may be wiped out. "The investors have their cash in a product called DBS High Notes 5 that the bank offered wealthier clients last year." Even muni bonds were hit hard yesterday (check out ETF MUB) which underscores the extent of the panic.

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CNBC Stock Blog:

- VIX at 50!? Options Boil on Volatility

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The point isn't to single out one bank or product, but that this is a microcosm of what is occurring as the bankruptcy reverberates throughout the system. Then we had the collapse in the Russian stock market and then we had AIG.....And the mad rush to "safe" collateral was on yesterday culminating with US cash management bills being bought at 0.1 basis point. Yes, that's 0.1.

After Fed Funds traded as high as 9% last night, we had a coordinated liquidity add by the major central banks that is assisting in easing this panic into cash. The U.S. Federal Reserve made an extra $180 billion available to central banks around the world to lend on to their local commercial banks in a bid to get dollars circulating in overnight and term money markets according to Reuters. The Fed wire is now open late into the night to add the liquidity necessary to keep the gears of capitalism going.

We've seen a big shift overnight in the direction of Yen/Chf carry positions as these trades have rallied signaling a return back into "risky" assets. Oil has rallied strongly, bonds have sold off, and equities have rallied....for now. I'm looking for more of this today as the markets try to catch their breath and assess the damage. GS and MS have rallied as well as they appear to be surviving the crisis.

Wachovia and MS are in merger talks according to CNBC. Wamuhas put itself up for auction with its extensive California branch network a major attraction for buyers. SEC's Cox has changed the rules for short selling and is now requiring hedge funds to report their shorts. Lloyds Bank buys troubled HBOS mortgage lender. There's talk in Congress of putting together an RTC like entity to buy distressed debt from the entire financial sector community. Even Russia has come out with a package to assist their stock markets.

For the time being, this all has stabilized the financial system. It will continue to push out from the financial system into the mainstream economy as job and credit losses manifest in higher borrowing costs and lower demand for goods and services.

How far it reaches, too soon to say. Unfortunately, the global economic race to the bottom has been taken back over by the United States.

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Andrew Busch

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Andrew B. Busch here
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