White-Knuckle Market Updates and Quotes (Updated)

The latest sightings:

Money market rates doubled overnight: despite considerable central bank intervention:

The cost of borrowing in dollars overnight more than doubled as banks hoarded cash amid speculation more financial institutions will fail.

The overnight dollar rate soared 333 basis points to 6.44 percent today, its biggest jump, according to the British Bankers’ Association. Rates climbed yesterday after Lehman Brothers Holdings Inc. succumbed to mounting credit-market losses and filed for bankruptcy….

The European Central Bank, Bank of England and Swiss National Bank offered financial institutions emergency cash for a second day as the credit rout threatened to derail markets.

The Frankfurt-based ECB offered 70 billion euros ($100 billion) in a one-day refinancing operation. Fifty-six banks bid for a total of 102.5 billion euros. The Bank of England injected 20 billion pounds ($36 billion). The SNB also said it will offer overnight cash..

Stocks continued to fall. Dow futures down 78 as of this writing, which is almost cheery under the circumstances.

Europe’s Dow Jones Stoxx 600 Index declined 2.4 percent. The MSCI Asia Pacific Index decreased 3.9 percent as trading resumed in Japan, China, Hong Kong and South Korea after markets were shut for public holidays yesterday. Futures on the Standard & Poor’s 500 Index slipped 1 percent.

UBS, the largest Swiss bank, lost 9.2 percent 18.26 francs. Natixis SA, France’s fourth-biggest bank, slumped 9.7 percent to 2.69 euros.

Barclays Plc, the U.K.’s third-largest bank, retreated 5 percent to 300.25 pence. The bank said today it’s in talks to buy assets from bankrupt Lehman Brothers Holdings Inc. two days after abandoning plans to acquire the entire securities firm.

Mitsubishi UFJ fell 7.7 percent to 792 yen, while Sumitomo Mitsui Financial Group Inc. declined 9.8 percent to 619,000 yen.

Some guarded optimism:

“Things can’t get much worse,” said Roland Lescure, who manages the equivalent of $128 billion as chief investment officer of Groupama Asset Management in Paris. “We’re at the heart of the storm right now. The downgrade of credit ratings is bad news, but inevitable.”

And a more alarmed take:

If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow.

Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed….

More promisingly, A.I.G. asked the Federal Reserve for a bridge loan. True, there is no precedent for the central bank to extend assistance to an insurance company. But these are unprecedented times, and the Federal Reserve should provide A.I.G. with some form of financial support while the company liquidates its mortgage-related assets in an orderly manner.

The Fed cannot afford to stand on principle. The myth of free markets ended with the takeover of Fannie Mae and Freddie Mac. Actually, it ended with their creation.

Another assessment hoisted from comments:

I think a failure of AIG would without doubt cause the entire banking system to seize immediately. CP and REPO mkts would become closed or prohibitively expensive to many market participants on top of what is now essentially a frozen CDS market. No ability to finance, no ability to hedge credit, and no liquidity, a death blow.

Under such a scenario the $70b REPO we saw today to pull FED funds back from 6% would be a drop in the bucket…

Barclays may buy Lehman assets:

Barclays on Tuesday confirmed that it was in talks with Lehman Brothers to buy some of the US banks’ assets. If a deal comes to fruition it is likely to be tied up rapidly, possibly by later in the day….

Barclays is likely to be interested in the broker dealer activities, including the equity, M&A and debt activities. It would not wish to take on any of Lehman’s troubled assets or to expose itself to any unknown pricing or capital risks. It is not thought to be interested in buying Neuberger Berman, Lehman’s asset management business.

The UK bank could take on the people in Lehman’s broker-dealer businesses and buy the related infrastructure and licences, enabling it to expand its investment banking business in line with the strategy it has previously outlined.

The opportunity to buy a business of such a size – Lehman was the fourth largest investment bank on Wall Street – at what could be a knock-down price would appeal to Barclays.

There was no indication on Tuesday of the price Barclays might have to pay or how it would finance a deal. However, the price could be low since Barclays is unlikely to want to pay more than book value for assets that have a relatively low worth. There is unlikely to be any goodwill attached to the Lehman’s name.

Brad Setser compares the Lehman default to Argentina’s and concludes Lehman’s is bigger and the parties exposed to it less well prepared.

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  1. Anonymous

    It's not fun to watch things like this. However, it is fundamentally dishonest for the government to bamboozle people into making speculative investments to insolvent financial institutions. Giving insolvent institutions funding so they can make foolish bets in hopes of making a comeback is a horrible approach. For a while the government took that approach in the S&L crisis.

    The economy needs sensible loans, and the government should capitalize the healthy banks with enough funds to make sensible loans. The economy doesn't need to give below market financing to people that want to make imprudent loans. That leads to disaster.

  2. a

    I’d agree with the last quote. If AIG goes, then there will be only one sort of lender in the market – the central banks. CDSs will go through the roof, and stocks tank. It won’t be the end of the world, but it just might be the end of the world as we know it.

  3. VocieFromTheWilderness

    So the New York times wants us to think that free markets ended with the creation of fannie and freddie does it? Golly gee, since I get all my news from Fox, I’ve entirely forgotten how to remember history, and facts and truth are complete chimeras to me. Yes today is just like 1936 politically absolutely, where do I sign?

    Oh goody, goody the NY Times wants to take tax payer money to prop up hedge funds and ensure the continued safety of the wealthy. What a great plan!

    Who cares about the balance sheet of the federal government. They can bail anybody out, anybody. They are big momma bear, and no amount of intentional mismanagement, or willful distruction will ever change her power and might.

  4. Anonymous

    There is the classic ecological paradigm of the foxes and rabbits on some small arctic island. In a non-ending cycle the rabbits multiple and so do the foxes Til suddenly there are so many foxes rabbit population tanks, foxes starve then rabbits start to do their thing over again.
    But PETA in its goodness now decided to feed the poor rabbits and more took out mortgages. But finally nature prevailed and its a big starve time for the foxes

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