Busch: Three Key Reversal Steps For Crisis


SEC + FSA=No Shorts Today!:After bank executives and politicians have blamed hedge funds (and other nefarious market participants) for the extreme volatility in financial sector equities, both the U.K. and the U.S. market regulators imposed bans on short selling in these stocks. Also starting Tuesday, the FSA will require investors to disclose each day any short positions in excess of 0.25% of the ordinary share capital of financial companies at the end of trading the previous day. These new regulations will stay in place until until Jan. 16, although they will be reviewed after 30 days.

After coming under heavy criticism from Republican presidential candidate John McCain, SEC has issued an emergency order on Friday temporarily halting short selling of 799 financial stock. SEC head Christopher Cox said "The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress."


Pump Up The Volume:Yesterday and today, we have continued world central banks putting liquidity into the global financial system to stem the credit crunch I detailed yesterday. Japan, Australia, India, Indonesia, United Kingdom, Switzerland, and Europe all joined today to provide US dollar liquidity that has been demanded by banks. While this appears to be ongoing, the amounts are staggering with $42 billion from the Far East central banks and $70 from European central banks. Obviously, the US has been pumping in massive amounts as well. Last night, Fed Funds traded at 0% and closed at 1/8%.


Today, we had another extraordinary development as the US Treasury department announced a massive program to shore up the nation's money market mutual fund sector. (Treasury Announces Guaranty Program for Money Market Funds) "Under the program, Treasury will insure the holdings of any eligible publicly offered money market fund.

The funds must pay a fee to participate in the program. The insurance program will be financed with up to $50 billion from the Treasury's Exchange Stabilization Fund," according to the WSJ. This came after the Primary Reserve money market fund "Broke-The-Buck", Putnam Investments closed and liquidated its Putnam Prime Money Market Fund, and Bank of New York Mellon confirmed that a cash collateral account per-share value had briefly dipped to 99 cents. (NYT)


The Big Plan:Today at 10:00 AM ET, Treasury Secretary Henry M. Paulson, Jr. will hold a press conference at the Treasury Department to discuss a comprehensive approach to market developments. CNBC broke the story in the afternoon yesterday that the Tsy and Fed were formulating a plan similar to the 1989 Resolution Trust Corporation to deal with the toxic debt held on many financial institutions balance sheets. Last night, Paulson and Bernanke met with Congressional leaders to brief them on their plan. Clearly, this was something that they have been working on since at least the take-over of Fannie/Freddie....if not longer.

Remember, this is now entering the necessary political phase of the process. No longer will Paulson be allowed to commit the United States balance sheet unfettered and unsupervised. By definition, this means the process slows down and different constituencies must be heard from to allow the program to be developed. Even still, this is moving extremely fast for our government. This comes with definite pitfalls and perils as the structure will have to answer arcane and technical questions. However, you can boil it down to this: what bonds will be bought at what price from which institutions?

Let's put this into perspective. The RTC was signed into law in 1989 and was eventually folded into another part of the government in 1995. It cost the taxpayer around $4,000 each or about $75 billion. Let's say this crisis is twice as bad. This means the problem won't be done until around 2020 and with over $150 billion in costs or $8,000 each. I think this is an underestimate, but it gives everyone an idea of where we are going with this program.



Andrew Busch

Andrew B. Busch here