Global Financial Seizures Continue, Gold Soars

By: Mike Shedlock | Wed, Sep 17, 2008
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Gold bulls have something to smile about today as it is soaring by more than $50 in the wake of renewed financial seizures. The markets have greeted the news Nationalization of AIG: Treasury to get 80% stake in return for $85 billion with a bang.

Treasury Secretary Paulson has been on the phone all day assuring multiple countries Don't Worry, The Banking System Is Sound.

With that backdrop let's consider some of today's seizures starting with Russia.

Russian Markets Halted

Bloomberg is reporting Russian Markets Halted as Emergency Funding Fails to Halt Rout.

Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar- denominated RTS halted trading after similar declines.

The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers Holdings Inc. bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent today.

"The bond market remains effectively closed and banks are reluctant to lend to one another," said Julian Rimmer, head of sales trading at UralSib Financial Corp. in London. "The problems experienced by KIT Finance have heightened counterparty risk and reduced liquidity further."

Genius Fails Again

It is fitting that Russia is back in the news because it was the demise of Long Term Capital Management that kicked off a string of moral hazard interventions by the Fed that continues to this day. Please see Genius Fails Again for a recap of LTCM and the 1997 Russian Bond market collapse that then threatened the financial system. The derivatives mess today is thousands of times greater.

Hedge Funds Frozen

One has to wonder what today's derivatives geniuses were thinking (or rather not thinking) as they watched the collapse of Bear Stearns while munching on popcorn headed into last weekend's poker party with Merrill Lynch (MER), J.P. Morgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Bank of America (BAC), Barclays, sitting at the table with Lehman (LEH) as the pot. See Fed Sponsored Poker Party Morphs Into "Old Maid"

No bets made revealing what we all knew, Lehman was worthless. That forced Lehman into bankruptcy at midnight Sunday.

Hedge Funds Frozen

Today Hedge Funds Are Frozen In Wake of Collapse of Lehman.

The collapse of Lehman Brothers Holdings Inc. is creating a quandary for hedge funds: Who to do business with in a tumultuous prime-brokerage industry.

Late last week, many hedge funds scrambled to shift that business away from Lehman and to other so-called prime brokers, which provide trading and lending services to the funds. But some were caught up in the bank's move to file for bankruptcy protection on Monday, say lawyers and other industry specialists. As a result, they have found their holdings effectively frozen, with no indication of when they might be able to access them.

Legal experts cautioned that it could be weeks or months before the mess is sorted out, leaving hedge funds unable to unwind positions at a time when many assets are falling sharply in value.

Money Markets Frozen

Reserve Primary Fund (RFIXX), the oldest US money-market fund, became the first in 14 years to break the buck after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

Shareholders pulled more than 60 percent of the fund's $64.8 billion in assets in the two days since Lehman folded. Reserve Primary Fund reacted by placing a seven-day freeze on redemptions. Please see Money Market Fund Breaks $1, Suspends Withdrawals for more details.

Massive Flight To Safety

Bloomberg is reporting Treasury 3-Month Bill Rates Drop to Lowest Since at Least 1954.

U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of American International Group Inc.

Investors pushed the rate as low as 0.233 percent as the loss of confidence in credit markets deepened. Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman.

"People are extremely cautious with respect to who they're lending money to at the moment," said Richard Bryant, a Treasury trader at Citigroup Global Markets Inc., one of the primary dealers that trade government securities with the Federal Reserve. "They're willing to buy very short-dated Treasury instruments and forgo returns and in some cases pay for the privilege of knowing their money is safe."

Central banks around the world pumped more than $280 billion into the financial system this week as they sought to ease a credit-market seizure. The Fed offered the loan to AIG, the biggest U.S. insurer by assets, in exchange for control.

The AIG rescue "smacks of sweeping the problem under the carpet rather than solving it in a structural sense," said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam, in a note to clients.

Global money market rates hit 9-yr high

Business Standard is reporting Global money market rates hit 9-yr high.

The cost of borrowing in dollars for three months has jumped the most since 1999, with banks hoarding cash amid concern that more financial institutions will fail.

The London Inter-Bank Offered Rate, or Libor, rose 19 basis points to 3.06 per cent, the British Bankers' Association (BBA) said today. The increase was the biggest since September 29, 1999. The overnight dollar rate fell 1.41 percentage points to 5.03 per cent today. It soared 3.33 percentage points yesterday, the largest increase in its history. It was at 2.14 per cent a week ago.

"Everybody is worrying about which bank is going to go bankrupt next," said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. "There's almost nothing being traded in the money markets. Nobody trusts anyone else."

Credit markets seized up as the collapse of Lehman Brothers Holdings and the US government's rescue of the American International Group (AIG) spurred concern that more financial companies may collapse. HBOS, the UK's biggest mortgage lender, slid as much as 52 per cent today on speculation that it may not have access to funding. The shares rebounded after two people familiar with the situation said the Lloyds TSB Group is in talks to buy the bank.

The cost of borrowing in the euro for three months rose half a basis point to 4.97 per cent today, the European Banking Federation said. That's the highest level since December 5, 2000.

Global Systemic Distrust

"There's almost nothing being traded in the money markets. Nobody trusts anyone else."

Welcome to the wonderful world of derivatives and 30 times leverage Mr. Bernanke. Not many can claim to threaten the world's financial system. It took years of hard effort, but you, Greenspan and the Fed, in conjunction with fractional reserve lending, managed to pull it off. You and the Fed should be proud. Stand up and take a bow.



Mike Shedlock

Author: Mike Shedlock

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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit to learn more about wealth management for investors seeking strong performance with low volatility.

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