Financial World Shaken
In a move sure to reverberate throughout the financial world the US House of Representatives failed to pass the US bailout by a vote of 228 to 205. Stock markets reacted quickly and violently with the Dow falling 700 points. Political bickering was blamed for the defeat but several Republican legislators refused to support the bailout plan proposed by the Bush administration. Recent actions by the Fed have somehow made the US dollar the currency of choice for risk adverse investors and interbank Forex markets.
Political Opposition
Democrats said the bill does not do enough to protect average Americans. In an excerpt from Speaker of the House Pelosi’s speech she stated, “Democrats insisted that legislation responding to this crisis must protect the American people and Main Street from the meltdown on Wall Street. The American people did not decide to dangerously weaken our regulatory and oversight policies. They did not make unwise and risky financial deals. They did not jeopardize the economic security of the nation. And they must not pay the cost of this emergency recovery and stabilization bill.” Representative John Culberson, a Republican from Texas, said the measure would leave a huge burden on taxpayers. “This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions.”
Markets React
Credit markets remain frozen and the crisis has spread to Europe. Several banks have been taken over recently and in the UK the government had to bail out mortgage giant Bradford and Bingley. Banks and financial firms in both the US and Europe have essentially ceased loaning money to each other in recent weeks creating a serious credit crisis. Interbank Forex markets also reacted and the future of the US dollar remains uncertain. The crisis stems from mortgage backed securities which saw their value plunge as home prices have gone into their worst slide since the Great Depression. In turn the market for these toxic securities evaporated leaving many banks holding greatly devalued securities which could cause the failure of firms holding these securities.
Financial Sector in Disarray
The failure of the bailout plan follows weeks of sobering news from the US banking sector. Monday morning, the Federal Deposit Insurance Corp. arranged for the sale of the banking assets of Wachovia, the nations fourth largest bank to CitiGroup for 2.2 billion dollars in stock. In other news, the Fed bailed out insurance giant American International Group, loaning it $85 billion in return for a nearly 80% ownership, and Washington Mutual became the biggest bank failure in US history.
Both the White House and Congressional representatives and Senators have indicated that the plan is not dead and that a compromise can be worked out. Markets around the world including Interbank Forex will be watching with intense interest.
European Lending Rates Jump
Key bank to bank long term lending rates in Europe jumped to their highest since 1995 from 5.142 to 5.237 a move sure to reverberate through Interbank Forex markets. The six month rate also jumped to 5.315 from a former rate of 5.290. European rates are fixed by the European Central Bank. (Euribor) It is becoming painfully obvious that the financial crisis is not limited to the US.
The Contagion Spreads
The US financial crisis has become contagious, spreading to European banks and financial institutions and Interbank Forex markets worldwide. In the UK mortgage giant Bradford and Bingley had to be rescued by the government. Shares of French bank Dexia tumbled more than 20% because of a newspaper report that the bank may launch an emergency capital increase. On Sunday the governments of Belgium, Luxembourg, and the Netherlands announced an 11.2 Euro bailout of one of Europe’s largest banks.
Highlights of the US Bailout Plan
Markets, including the Interbank Forex, have been in a state of disarray with global money markets waiting for the details of the proposed US bailout. The US congress is set to vote on the compromise bailout package on Monday, September 29th. After almost a week of political haggling Democrats and Republicans have reached an agreement. Highlights of the bailout plan include;
- The government would have broad powers to buy billions in mortgage related assets.
- The plan lets congress block half the money. The government can access 250 billion immediately, 100 billion more if the president certified it was necessary, and 350 billion more with a separate certification.
- Executives of companies who benefit from the bailout will see limited compensation.
- The plan requires the government to try to renegotiate bad mortgages with the intention of lowering monthly payments.
- The government would receive stock warrants in return for assistance, giving American taxpayers the opportunity to share in future profits.
- After five years the government would submit a plan to congress on how to recover any losses from companies receiving assistance.
Financial analysts are hoping that the passage of the US bailout plan will bring a semblance of stability to global markets. With the crisis spreading well beyond the borders of the United States passage of the compromise bailout plan is seen by many as a way to stem the tide of bank failures in Europe. Credit markets and interbank forex lending have all been virtually frozen by the US financial crisis and it is hoped that the infusion of billions of dollars will cause credit to flow freely again. It is hoped that the bailout and other recent actions of the Fed will shore up the US dollar on both retail and interbank Forex markets.
Bailout Agreement Bogged Down
The failure of the Bush administration and Congress to reach an agreement by weeks end the seizure of Washington Mutual (WaMu) is sending ripples through financial markets worldwide including the interbank Forex. Talks bogged down due to disagreements between Democrats and Republicans over several details of the Bush proposal. Legislators from both parties seem confident an agreement will be reached by Sunday.
The WaMu Seizure
The seizure of WaMu is the largest bank failure in US history. The bank’s assets have been sold to J.P. Morgan Chase and Company for 1.9 billion dollars creating the largest bank in the US. In Europe Belgian-Dutch financial group Fortis NV denied liquidity problems despite falling share prices. Banks throughout the world are heading cash driving rates that institutions charge each other for loans to a record high in London. These moves are certain to affect the interbank Forex market. In other European news HSBC Holdings Plc, said it was cutting 1,100 jobs, blaming the credit crisis.
Effect On Global Money Markets
All these factors have caused global money markets to dry up forcing central banks to increase injections of cash due to high dollar borrowing rates. Said Boris Schlossberg, director of currency research at GFT Forex in New York, “The markets are just caught like a deer in the headlights, watching Washington, trying to figure out what the next step is.” To add to all these concerns shares of Wachovia fell as much as 26%, and shares of Midwest based KeyCorp fell 7%. Despite the worries on Wall Street the strength of the US dollar has kept interbank Forex markets relatively calm compared to stock markets.
Uncertainties in World Markets
Because of uncertainties about the bailout and the political disagreements world financial markets reacted. US stock prices fell 1% and losses were reported in Asian and European markets. Banking woes extended into China where shares of Ping An Insurance fell 9.7%. Financial advisors have been besieged with questions and concerns from investors. Said Cleveland Plain Dealer columnist Teresa Dixon Murray, “There’s a feeling of helplessness that nobody seems to have the answers.”
Obviously the interbank Forex markets will remain in limbo until an agreement is reached in the US congress. With banks hoarding cash and rising lending rates, Interbank Forex trading conditions will remain difficult. One can only hope that the US congress and the Bush administration can reach a swift accord.
A Brief History of AIG
American International Group, Inc. was founded in 1919 in Shanghai, China by Cornelius Vander Starr. Mr. Starr was the first westerner in Shanghai to sell insurance to the Chinese. The firm was successful and expanded it’s operations to other countries in Europe, Latin America, and the Middle East. In 1962 AIG gave control of the unsuccessful US operations to Maurice Greenberg who changed the company’s focus from personal insurance to high margin corporate coverage.
A Shady Past
By 2005 AIG was the subject of a number of fraud investigations by the US Justice Department, the Securities and Exchange Commission, and the New York Attorney General’s office. The investigations resulted in the ousting of Mr. Greenberg, a $1.6 billion dollar fine, and several executives faced criminal charges. After several CEO’s were forced to step down Edward M. Liddy became CEO on September 17, 2008.
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Buffett Steps In
In a move reminiscent of J.P. Morgan’s attempt to salvage Wall Street in 1929, billionaire investor Warren Buffett invested 5 billion dollars in Goldman Sachs Group Inc. Berkshire Hathaway Inc., owned by Buffet announced it was purchasing 5 billion in preferred stock and indicated a future purchase of 5 billion in common stock. Stocks stabilized following Buffett’s investment but credit markets are still awaiting more news about the US government’s plan to bailout banks. Interbank forex lending has all but ceased and central banks are hoarding the dollars and gold in their possession.
Goldman Sachs also announced it will offer 5 billion in common stock to the public. Goldman Sachs and Morgan Stanley were granted approval to become bank holding companies and it is hoped that this will allow them to strengthen their balance sheets.
Although Buffett’s move calmed skittish investors, the financial world is awaiting today’s appearance of Treasury Secretary Paulson, former CEO of Goldman Sachs, and Federal Reserve Chairman Ben Bernanke. Although there is significant opposition to the bailout from Democrats and conservative Republicans it is hoped that the bailout will proceed quickly.
The Effect On Interbank Forex Markets
All these events have created uncertainty in the Interbank Forex markets despite the efforts of several central banks around the world. The Federal Reserve acting with Australia and Scandinavia moved to provide liquidity while Europe, Britain, Japan and Australia pumped billions of dollars into their respective banking systems. Once a bastion of liquidity, the short term lending markets where banks lend to each other has come to a grinding halt due to concerns of the creditworthiness of borrowers.
The Struggling Dollar
The dollar continues to struggle on Interbank Forex markets due to uncertainty about the financial position of the US and the perceived political opposition to the bailout of financial institutions by the government. The dollar has fallen against the Euro but is rising against the Japanese Yen.
Interbank Forex Conditions Remain Uncertain
Until the terms and conditions of the US bailout become clear, markets, including the Interbank Forex, are facing uncertain conditions. Investors around the world are hoping for a quick and solid solution to the volatility of this weeks markets.
The Forex Market
The forex market is one of the largest, if not the largest market with up to two trillion dollars traded daily. Unlike stock exchanges the interbank forex market is not a centralized market. In a centralized market like the stock exchange there is a central every transaction is recorded by price and volume.
The forex market is a decentralized market with no central market where transactions are recorded. The interbank forex market relies on market makers who record their own transactions and the information is kept private. A market maker is a broker-dealer firm that facilitates the buying and selling of securities or currency. The primary market makers in forex are the world’s largest banks.
The Interbank Forex Market
The interbank market is the system of trading currencies among the world’s largest banks and while most of the transactions are done between the banks themselves some banks do handle forex transactions on behalf of large customers. It has been estimated that 50% of all interbank forex transactions are between the banks themselves. The interbank forex is the source of price quotes that enable investors and brokers to make informed decisions.
Interbank Forex Transactions
According to the Wall Street Journal 73% of all interbank forex transactions are done through 10 major banks. Most of these banks maintain a separate group known as the Foreign Exchange Sales and Trading Department. Each Foreign Exchange department contains a sales and trading desk. The sales desk is responsible for taking orders from clients, getting market quotes and relaying that information to the client. The Trading Desk is responsible for making decisions based on market information and many traders specialize in certain currency pairs. Usually banks will have traders that are responsible for all trading in specific currency pairs, the EURO/USD for example.
Banks determine currency prices by a variety of factors; how much of a particular currency is available at the current price, the current market rate, inventory, and opinions on where the price of the currency is headed. Unfortunately banks are reluctant to share all this information with brokers and investors.
Interbank Forex and the Small Investor
In the past the interbank forex market was the exclusive domain of the world’s major banks and small investors were excluded. Today firms are able to offer access to this dynamic market to individual investors. The interbank forex market is available 24 hours a day and quotes may be seen online for easy monitoring of accounts. The interbank forex market is no longer the province of banks alone. The interbank forex market is available 24 hours a day, six days a week so individual investors are not limited to traditional business hours. The interbank forex market offers some very exciting opportunities to investors, large or small.
