Posted on June 15th, 2008 in Daily Stock Market / Economic News - The Real Story
First, a two-month stock market rally citing the ‘Bear Stearns event’ as the bottom, which caught many shorts (who were right all along), with their pants down. Then, beginning a few weeks ago, the markets rolling over because underlying conditions in the primary sector that led to the this mess in the first place, housing, is continuing to worsen. This caught ever-optimistic longs and bubblevision with their pants down. Finally to this.
This is not the first sign of the ‘Fed Put’ or ‘Moral Hazard’ over the past many months, but last time around Bonds and CDS did track the stock price and volatility of the institutions in question. However, things like this highlight which constituancy Bernanke serves, and why there is such dissent ion within the US Gov’t and Federal Reserve itself. First due to the months of denial and then the swift bailout of the very companies that started all of this in the first place causing an inflationary ripple effect being felt across the world.
Posted by John Carney, Jun 13, 2008, 4:10pm
Investors bid up Lehman Brothers’ bonds yesterday after news broke that the company was replacing two top executives. The price of protection on Lehman bonds also declined. This reaction–which starkly contrasts to the decline in Lehman’s share price yesterday–has government officials concerned.
Government officials who spoke to DealBreaker on the condition of anonymity said they are worried that the market is convinced the Federal Reserve won’t let a major US securities firm collapse. This is a cause for alarm because it indicates that investors are not taking into account full range of risks faced by investment banks, which could in turn remove an important market check on risky behavior. Although Lehman and its rivals have been pushing down debt levels recently, cheap debt that is unlinked to institutional risk could encourage a new round of re-levering, one official warned.
“What we saw yesterday was moral hazard in action,” the official said.
The price of credit default swaps for Lehman is now half of what it was in March, the Wall Street Journal pointed out this morning.That can be looked at as a dramatic demonstration of the value of having the Federal Reserve’s implicit guarantee of Lehman’s credit worthiness. In recent weeks, officials from the Federal Reserve have publicly remarked on the dangers created by this guarantee. On Wednesday, Treasury department undersecretary Robert Steel went out of his way to stress that the window was not a permanent guarantee for securities firms.