What Geithner Is Like

Tim looks at you and is very frank,telling you what a policy can and cannot do,Mr.El-Erian revealed.He has the self-confidence that comes from years of experience.There is no alternative for government involvement;Mr Geithner understands it has to be targeted and reversible,and that's a good thing,Mr.El-Erian observed.Susie Gharib,co-anchor of Nightly Business Report,has served with Mr.Geithner on the board of trustees of the Economic Club of New York.She describes him as very smart,thoughtful and humble.He is very diplomatic,she said.Mr.Geithner,who is the married father of two,is Mr.Experience.He has served under three presidents and five Treasury Secretaries,holding posts in the Federal Deposit Insurance Corporation,the Federal Reserve and the Treasury Department,where he was Assistant Secretary for International Affairs.He is currently President of the Federal Reserve Bank of New York,helping to resolve the Bear Stearns,American International Group and Citigroup issues.

Buffett's Best

Warren Buffett,a grandfatherly billionaire,says the economic crisis is not a short run phenomenon.We are already in a recession.The Federal Reserve did the right thing in bailing out Bear Stearns(BSC),but the U.S. dollar will continue to drop for the next 10 years.Nonetheless,he continues to look for a business he can understand,at a sensible price and with a durable competitive advantage-a business he can trust,such as Coca-Cola(KO),American Express(AXP),Procter and Gamble(PG),Burlington Northern(BNI) and Johnson and Johnson(JNJ).He has added them to his portfolio.Mr.Buffett is very fond of cherry Coke.

Ben Bernanke

Ben Bernanke,the chairman of the Federal Reserve,the U.S. central bank,and a former professor,has been focusing on the economic dislocation.He notes that the U.S. economy is still going through a very difficult period.It should strengthen in the second half of 2008,returning to growth in 2009.Much adjustment has already taken place,but the financial markets are still under stress.So far,hedge fund behavior has not created losses for our major financial institutions.The sudden failure of Bear Stearns(BSC) would likely have led to a chaotic unwinding,which would have been felt broadly in the real economy,Mr.Bernanke said,justifying the Federal Reserve's intervention in the matter.

Lehman's Outcome

Lehman Brothers(LEH) is similar to Bear Stearns(BSC),but has a more diversified business.Erin Callan,Chief Financial Officer,said the dealer's outcome for the first quarter was pretty good.Lehman's earnings were better than expected.The Fed's discount window is a great opportunity for them.The equities markets remain weak.We have a lot of confidence to build back into the system.She wouldn't expect it to feel stable until 2009.There's been a sea change.The question of Lehman's liquidity is now off the table.The much bigger question is what's the best way to run this business model.She was shocked by the Bear Stearns takeout.It was a very bold move by the Federal Reserve,and exactly what was needed to stabilize the environment.It has been very difficult to access unsecured funding for the past three months.For the rest of the year,there will be very little access to it ,if any.Liquidity is only one part of the story.The balance sheet is also important.Ms.Callan expects volatility through the second quarter.Lehman Brothers has been upgraded to a buy rating by Goldman Sachs(GS).

Lehman Goes To Window

Lehman Brothers(LEH),one of the 20 Primary Dealers,has gone to the Federal Reserve's discount window for these firms,or Primary Dealer Credit Facility.At this window,the Fed is taking a broad range of collateral in exchange for cash.Assets accepted include mortgage-backed securities,municipal and corporate bonds,as well as collateralized debt obligations.The assets must be rated investment grade by at least two credit rating agencies and have market prices.The dealers get 95.00 U.S. for every 100.00 of collateral they submit.The transaction goes through a clearing bank such as Bank of New York Mellon(BK),where the collateral is deposited and the cash handed over.The Federal Reserve opened the window to dealers in order to prevent further cash flow problems.On 16 March,Bear Stearns(BSC) was on the brink of bankruptcy when it lost the confidence of partners and clients.Now the dealers can shore up their finances as needed,so long as they have the collateral to put up for the loans.

Closer To The Bottom

Mark Konyn of RCM Asia Pacific characterized the situation as the ravages of a bear market.Basically the Bear Stearns sale was a bust.A lot of confidence has been lost.It feels like we're closer to the bottom of the crisis.It's the final phase of disclosure,an unwinding of the leverage.There is a move from illiquidity to insolvency problems,which parallels the situation in Japan in the 1990s.

Historic Night

Sunday night was a long,historic one.WSW heard of an emergency Federal Reserve action at about 7PM,and worked until 11:30 PM to ascertain the facts.The central bank had cut the discount rate-the rate at which the Fed loans to troubled banks-by .25% to 3.25%.It also opened the discount window to investment banks-an extraordinary move-and extended the loan period to 90 days.David Roche of Independent Strategy said the Fed was making policy on the hoof.It was a panic move,but it would probably work,Mr.Roche said as the Asian markets opened in crisis.The Federal Reserve was bracing the markets for the news that old line firm Bear Stearns(BSC)was near collapse and had been bought for 2.00 U.S. a share by JP Morgan Chase(JPM).Bear's partners had lost confidence in it and refused to loan it any more money,since Bear was deeply involved in the subprime mortgage debacle.The Fed agreed to back JP Morgan's bid with 30 billion dollars in securities guarantees.It could not let Bear,the fifth largest U.S. broker-dealer,fail,as that would devastate the already weak credit markets.

Money Men Cautious

Several leading money managers have expressed a guarded attitude toward the stock market.Brian Gendreau of ING cited credit tightening and bonds being pulled as worrisome.He looks for a tougher second half,though the market will end a little higher.There is an unquantified risk in the subprime mortgage market.In consequence,he is buying bonds and large companies,which are less dependent on credit.Christopher Ailman of CalSTRS is rebalancing the huge pension fund.He is unwilling to take risks until the subprime fog clears up.Mr.Ailman is concerned about high yield debt and alt A mortgages.Beginning in August,400 billion in loans will reset.This pressure could cause more problems such as those at Bear Sterns(BSC).Thomas Melcher of PNC's Hawthorn is waiting to see how much of the mortgage market is enveloped by distress.Consumer spending and possibly more hedge funds could be affected.A bond fund such as Lehman Brothers' TLT will be a popular haven until the fog lifts.Happy Independence Day,American readers.I am starting to feel heat because you aren't showing interest in the ad links.

Wall Street Wrestles

Wall Street is wrestling with the subprime mortgage problem.Subprimes,issued to borrowers with flawed credit,have been defaulting at a high rate.Bonds which are backed by subprimes have consequently been put at risk.Bear Stearns(BSC),a leading investment firm,has had to scramble to save two hedge funds that contain these bonds,which are called collateralized debt obligations(CDOs).Many prominent firms,such as J P Morgan Chase(JPM),Merrill Lynch(MER)and Deutsche Bank(DB),held over 20 billion dollars in such securities.The fear that the subprime failure will spread to corporate credit is adding to market nerves.It is a climate of complexity,uncertainty and leverage,according to Jay Mueller of Wells Fargo.In such times,investors might consider quality income funds such as Blackrock's BNA or Lehman Brothers' AGG.