Wednesday, September 24, 2008
Another day, another stunning piece of news that will save the global financial system for sure, this time. Yes, folks, the irresistable force has joined with the immovable object, and Warren Buffett has invested $5 billion into Goldman Sachs, thereby providing incontrovertible proof that history at least rhymes.
Macro Man will leave the in-depth analysis of the deal to others, and confine himself to the following three observations:
1) The deal says a lot more about Goldman than it does about Warren. The last time Macro Man checked, GS was not in the habit of writing $500 million annual checks (the yearly interest on the preferred stock) and giving away free in-the-money options out of the goodness of their hearts. If they are doing this deal, it suggests that (perhaps unsurprisingly) there was more than meets the eye to the last batch of Goldman results
2) When Warren last did a deal like this, in 1987, it clearly did not mark the bottom of credit-related equity distress, which occurred several years later.
3) Lehman Brothers conducted a similar offering at the end of March, which was over-subscribed. That went well, didn't it...
Meanwhile, the news just gets better and better in Europe. The French INSEE printed a new, below-expectation cyclical low....
...as did the ifo....
....leading the latter's chief economist to express a view that, at the risk of beating a dead horse, sounds oddly familiar.
Meanwhile, the FT carries a story today that echoes Macro Man's concerns about the European banking system. Given that every large, leveraged debtor has been punished in one way or another over the past year, it seems only a matter of time before European banks come under the cosh.
And indeed, that time might come sooner than you think. With the end of the quarter swiftly approaching, money markets are tightening notably as the three month date rapidly approaches the turn of the year. Despite the recent dollar swap arrangements, there is some suggestion that European banks in particular (and global banks generally) are desperate for dollar funding. It's worth noting that LIBOR funding levels are looking increasingly fictional.
The chart below shows three month dollar LIBOR versus the 3 month ICAP dollar fixing rate. When ICAP launched its fixing rates to great fanfare a few months ago, interest swiftly waned after they turned out to be very close to existing LIBOR fixings. Observe, however, how ICAP has recently started fixing much higher than LIBOR; the true cost of unsecured dollar funding is now close to 4%.
Money market pressures are not confined to the US, of course. Dec Euribor contracts are implying a rate of 5.30%, a premium of more than 1% to the ECB's refi rate. And despite now-consensus expectations of a BOE rate cut before year end, observe how the December short sterling contract has plummeted in recent days.
So clearly, the TARP has yet to save the day, following the the TAF, TSLF, and PDCF on the list of ineffective acronyms (though in fairness the TARP has yet to be enacted.)
Given the troubles in Europe, it would seem that a new, multinational taxpayer-funded program is required to enable ALL banks to de-lever and recapitalize. Macro Man has already devised a rough sketch of how such a program could work, and is available to consult with the G7 to make it happen.
Taxpayers around the world may be curious to learn what such a program might be called: Macro Man would suggest the Special Capital Raising/Extended Writedown Undertaking.