Henry, Ben and Warren…All to the Rescue at Once
It was quite a day for the economy and stock market yesterday in terms of free handouts…
First, U.S. Treasury Secretary Paulson said that he had made a deal with a large group of U.S. banks for a 30-day freeze on home foreclosures. Paulson made the deal with some of the biggest bank names, including Wells Fargo, Bank of America, and even Countrywide Financial.
The second big action in the market yesterday: the U.S. Federal Reserve, in its continued effort to fend off the looming credit crisis, said that it had auctioned off $30.0 billion in funds to U.S. banks at a reduced interest rate of only three percent. This now brings the total number of such Fed auctions to five, with a total of $130 billion pumped into the banking system so far since the Fed started this low-interest money auction process.
The Fed said that it stands ready to continue giving banks low- interest money to ensure that they have sufficient reserves. (Maybe I should be in the banking business: Paulson is stopping banks from the costly exercise of foreclosure, while Bernanke is giving them money almost for free so they don’t go bankrupt!)
Finally, Warren Buffett came to the rescue yesterday. Buffett said he wants to help out troubled bond insurers by offering an additional level of insurance: a form of reinsurance to protect bond insurers from the possible default of their customers.
So there you have it — Paulson, Bernanke and Buffett all to the market’s rescue at once. And what did we get for all those billions of dollars in help yesterday? A paltry 133-point rise in the Dow Jones Industrial Average.
Treasury Secretary Paulson acknowledged yesterday, “The worst (for housing) isn’t over yet, the worst is just beginning.” (No kidding; I’ve been writing this one theme on housing in PROFIT CONFIDENTIAL since 2005: The bigger the real estate boom, the bigger the bust.) With over two million Americans facing higher interest rates over the next 24 months as their mortgages reset to higher levels, the pain for homeowners is still in its infancy.
While a nice gesture by Buffet, coming to the rescue of the bond insurers and all, he didn’t become one of the world’s richest people by doing things for free. By his own admission, “We’re doing this to make money.”
As for Bernanke, what can the poor guy do? He inherited what I call “one hell of a bursting financial catastrophe” courtesy of his predecessor and now he’s stuck dealing with it. Drop interest rates like a rock, pump the banks with money so they are liquid…what’s next, dropping money from a helicopter?
In my 25 years of studying the economy and stock market, I’ve never seen such a concentrated effort of stimulus like we have from the government today. The scary part: it’s not working to lift the stock market yet.