No disrespect to Johnny Venom and his diary. After all, he's simply passing along what the financial media is reporting.
Nevertheless, the financial media is talking out of its a**. I believe the real reason for the huge rally in the markets today isn't because of some political reason, its for a very basic, fundamental reason that can be easily explained: the taxpayer is going to be taking on all the risk for the entire financial system.
See below.
WASHINGTON (AP) -- The FDIC will guarantee up to $1.4 trillion in U.S. banks' debt for more than three years as part of the government's financial rescue plan.
The directors of the Federal Deposit Insurance Corp. voted Friday to approve the plan, which is meant to break the crippling logjam in bank-to-bank lending.
The FDIC will provide temporary insurance for loans between banks -- except for those for 30 days or less -- guaranteeing the new debt in the event of payment default by the issuing bank.
The FDIC also will guarantee deposits in non-interest-bearing "transaction" accounts by removing the current $250,000 insurance limit on them through the end of next year. That could add as much as $500 billion to FDIC-backed deposits.
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The original plan called for FDIC guarantees for the new debt in the event the issuing bank failed or its holding company filed for bankruptcy. That didn't correspond to the usual practice in the marketplace, bankers told the FDIC, in which payment default is normally the event that triggers insurance.
The FDIC will back new senior unsecured debt that banks issue to each other between Oct. 14 and June 30, 2009. It would be insured by the agency through June 30, 2012. Senior unsecured debt does not have collateral underlying it but must be repaid before other classes of debt.
For those of you who don't understand what this means, I'll try to explain in layman's terms.
Normally, if you are a bank and you make a loan to another bank, and that bank goes bankrupt, then the bank takes a hit.
Now, with the new FDIC ruling, its the taxpayer that takes the hit instead of the bank.
Or to put it another way, the taxpayer is now backing the entire financial system.
But wait. The article says only those debts longer than 30 days. So the taxpayer isn't on the hook for short-term debt, right? Wrong. The taxpayer has already been backing short-term debt, also known as commercial paper, for over a month. Unlike the announcement above, this has been done through the Federal Reserve rather than the FDIC.
The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants.
I should point out that both the FDIC move and the Federal Reserve move were made without any Congressional vote.
So you see, the American taxpayer is now on the hook for pretty much the entire financial system. If the economy bounces back in the next couple months, no problem. But if the economy doesn't bounce back, and instead slips further into recession, then you, your children, and your grandchildren will be paying for these programs for the rest of our lives. The guarantees amount to trillions and trillions of dollars of debt.
You would think that something that important would at least get a Congressional vote, but you would be wrong.
[Update: Some of you are asking where the money will come from. That's a good question. I have a potential answer for you...but you won't like it.]
The United States has asked four oil-rich Gulf states for close to 300 billion dollars to help it curb the global financial meltdown, Kuwait's daily Al-Seyassah reported Thursday.
Quoting "highly informed" sources, the daily said Washington has asked Saudi Arabia for 120 billion dollars, the United Arab Emirates for 70 billion dollars, Qatar for 60 billion dollars and was seeking 40 billion dollars from Kuwait.
Al-Seyassah said Washington sought the amount as "financial aid" to face the fallout of the financial crisis and help prevent its economy from sliding into a painful recession.
The daily said the United States plans to use the funds to help the ailing automobile industry , banks and other companies suffering from the global financial turmoil.