It’s a Run on the Banks!!!

WASHINGTON — Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

Treasury Acts to Save Mortgage Giants – NYTimes.com

In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”

An official said that the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

I’m watching CNN right now report on this, and interviewing the people currently “running” on the bank.  All they want right now is to get their hands on their money, which is freaking them right the fuck out.  Since the only people worried are those with accounts over $100,000, they are all the rich folks…which makes it a great story for the 24-hour networks.

The banks have actually been running on empty for a good little while.  First there was the extra $200,000,000,000 that the Fed printed up a while back.  Which wasn’t really enough in the face of the disappearing mortgage money, the slowing economy, the weakening dollar, and the atmospheric oil.

Which killed the Bear (Stearns).

Which was the sign that things were already really bad.  What is happening with Freddie and Fannie is that they got stuck with all the crappy loans that filtered through the system. 

I actually know a bit about this topic, as I used to do some work for the FDIC involving closing banks.  Essentially we would consolidate loans and deposits and prepare them for sale to other banks.  The really crappy ones that couldn’t be sold would then be administered by the FDIC untill…whenever.

(note: I just heard a guy on CNN say “You could have a run on the banks” [which would be great for CNN])

So Fannie and Freddie got hit with all of the above and the necessity to take a bunch of shitty loans.  They are the drains for the mortgage industry and they got loaded with a whole bunch of crap, got clogged and the system starts to back up.

More on this later, but I thought it was funny when they were talking to the people waiting in line to make a run on the bank.

The Problem of Speculation

Saudi Arabia seeks oil price curb – Jun. 9, 2008

The Saudi announcement comes just three days after the biggest single-day price leap ever, when oil surged more than $11 to surpass $139 per barrel.

Retail gas prices rose further above $4 Monday in the United States, the world’s largest oil consumer, following the unprecedented price rally.

The kingdom will work to ensure there will be no “unwarranted and unnatural oil price hikes that could affect international economies, especially those of developing countries,” said Madani.

“There is no justification for the current rise in prices,” he said.

There isn’t any market justification for the prices right now, at least in the fundamental sense.  However, with all the strangeness going on and the way the market works, the prices now have spiked tremendously which is exacerbating some very real problems in developing countries.  When people are already rioting in the streets, run away oil prices have the ability to be a very nasty catalyst.

The Market Recursion Continues

Oil surges $11 to record $138 – Jun. 6, 2008

NEW YORK (CNNMoney.com) — Oil prices shot up nearly $11 a barrel and settled Friday at a record $138.54 on geopolitical jitters, a dollar decline and a forecast that oil would hit $150 by July 4.

Friday’s spike in the July contract for light crude on the New York Mercantile Exchange marks the largest single-day increase in oil prices on record. The contract hit an intraday record of $139.12, breaking the previous trading record of $135.09.

This looks like pretty much rampant speculation.  Everyone is trying to lock-in a good price (see Dodge’s 3 year price guarantee) and that’s pushing demand even further, plus problems in Africa and Iraq and a new round of sanctions on Iran…all pushing future demand through the roof.

Ultimately we have a flat-finite supply curve and an exponential-infinite demand curve, leading to a halfway-infinite price curve, which is to say, it will increase like demand, just half as quickly.

The price will continue to increase until the fundamentals change.  It will only level for a time, it will not decrease for an extended period of time for the foreseeable future.

Add that analysis to the others.