Another Big Bailout

The poor underwriting standards of lending institutions look like they are about to get another bailout…and this time it isn’t in the form of a Fed rate cut.

It now looks like the banks who have been scrambling to figure out a way to refinance special interest vehicles that have suffered substantial losses and still face large exposures to subprime mortgages are now banding together in coordination with the Treasury department to create a special fund for the sole purpose of holding their toxic securities.

There are tons of articles floating around on Bloomberg and the cover of WSJ, but here is a good one:Banks May Pool Billions to Stop Securities Sell-off

As the WSJ says:

The proposal echoes the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. And the current round of crisis-driven collaboration illustrates the heightened level of concern among both government and financial players.

I have been talking about the remaining challenges in the CP and bond markets for awhile, but surprisingly the equity markets have been resilient even while these banks have been working directly with the Federal government on this massive bailout. It seems a bit insincere for the powers-that-be to continue to tout a “strong economy” over the last few weeks while working behind the scenes on staving off a further crisis in our capital markets. These seem to be inconsistent phenomena.

And the fundamentals continue to get worse…and at least one rating agency is finally calling off the formality of putting CDO’s on a watch list before continuing to tell the truth about how bad things are getting:

Moody’s may accelerate CDO rating cuts after review

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