Gold prices went into melt-up mode as soon as Asian markets opened for trading last night. Echoes of the Bear falling rang loud and clear far away from Wall Street. The dollar plumbed new depths against practically every currency one can think of, and the Fed meeting is still looming. The Nikkei plunged 454 points and US stock futures looked primed for a market fall of some significant proportions. The dollar was in ICU, quoted at 71.25 on the index while crude oil remained above $110.00 per barrel. Fed General Hospital has turned into an ER full of triage beds.
Naturally, oil and many other commodities took off on full afterburners, on speculation that the complex will be the only safe harbor for coming months. Some of these individual commodities' owners may yet have to rethink the safe-haven buying surge and profitability, against the likelihood of much lower fundamental demand as the economy now looks set to tilt into negative GDP for at least the current quarter.
As a sleepless weekend came to an end for many a central and investment banker, the world markets played out their own version of March Madness. The Fed was pedaling as hard as possible, offering a 1/4 point surprise
discount rate cut, all kinds of extended terms, and heaps of cash to anyone starting to sport claws and brown fur. JP Morgan got to pick up the Bear carcass for $2 a share. Not a bad deal for a nice client list. Not much else left in there.
Spot gold prices reached into virgin territory overnight, recording a $1028.50 print on the offer side. As New York opened for trading in what promises to be a tumultuous week, spot prices were trading at $1015.30 up $12.80 in a show of force that, frankly, should have been seen last Friday. Some of last night's one-way euphoria dissipated in early going, but even is a brief correction is coming, the next leg up is only a matter of the next bad Wall Street news.
Participants now await the Fed's meeting and rate decision, but the street talk keeps obsessing about who might be the next Bear to get stuck in the subprime cave. No news would, indeed, be good news in coming days. Silver rose 1 cent to $20.68 and threatened to turn negative, but the noble metals fell early, and fell hard on recession fears and fund liquidations. Platinum lost $109 to $1964.00 and palladium lost $39 to $470 per ounce, respectively.
So, should the Fed play the RTC in this debacle? Financial Week opines that:
Proponents of the ongoing bailout contend that this is what a lender of last resort is supposed to do. But if, as some suggest, the central bank is effectively, albeit partially, nationalizing the banks, the federal government should be overseeing the job, just as the U.K. government is doing with Northern Rock. That way, not only can efforts be made to sell the bad loans to investors, but the banks' managers can be replaced (without receiving fancy exit packages) by executives beholden first and foremost to the public.
Socialism? Not at all. Nationalizing the banks would be akin to a Chapter 11 bankruptcy that wipes out shareholders. And there's ample precedent for proceeding along these lines. Consider the Resolution Trust Corp., which was legislated into being in the late 1980s after bad real estate investments decimated the savings and loan industry. To have the government bail out the banks instead through continued infusions from the Federal Reserve rewards bank managers and shareholders at the expense of the public.
Interestingly, the task of this ugly surgery may not fall on the Fed's shoulders alone. Some of our favorite targets of scorn may turn out to be white knights yet. Financial Week alerts us to the fact that:
About 60 other hedge funds are preparing to go bargain shopping for distressed (read: mortgage-backed) debt and leveraged loans for sale by besieged financial institutions. A London fund, Toscafund Asset Management, approached the board of Washington Mutual with an offer to participate in any consortium looking to recapitalize the mortgage lender, according to a report in the Wall Street Journal. Toscafund is part of Old Oak Holdings, which has a sizable stake in WaMu.
Such moves by hedge funds will help shore up the banks and begin to establish floors for toxic asset prices, industry experts say. They're going to be buyers of paper from other hedge funds and from the investment banks, said Mr. Snider. People are expecting about $200 billion worth of mortgages will be sold.
Good to know that creative minds are always at work. Where there is crisis, there is also opportunity.
Watch the Dow and keep glued to the TV for late breaking news on Fed measures and announcements. They are about to get quite creative too.