Vikram Pandit made a bold move last week, particularly in light of short tenure on the job. Taking the approximately $50 billion of SIVs and placing them on Citi's balance sheet is the right thing to do. It recognizes the seriousness of the festering credibility issue that the credit markets find themselves. For months now, market experts have been chiding the US Government and the Fed to take some action, primarily in the form of a lower Fed Funds rate. The Fed has obliged with 100 bp (so far), with little effect on the problem at hand (as predicted in this and other learned forums). They have, however, propped up the stock market. The reason why a lower Fed Funds rate isn't helping the credit markets is that rates weren't too high to create tight lending conditions. Fear, uncertainty, and the re-realization of the existence of credit risk put the market into its present state, something that even a 1% Fed Funds rate would ameliorate significantly. The way to move forward is recognize the problem, and Mr. Pandit's move goes a long way for Citi. On balance sheet makes the SIV mess more quantifiable for the rest of the investing world, which, in turn, makes it easier for the investing world to evaluate the risk. This is what the market is all about, evaluating and taking risks, with the potential for being rewarded for that risk.
To borrow a line from Spike Lee, it is time for the rest of Street to do the right thing. Citi maybe the biggest single player, but there needs to be some follow through from other big players for this credit situation can come to a resolution.
As a final note, let us not forget that, in the aggregate, markets are generally positive as compared to the start of 2007. There are certainly market sectors that are down for the year, but all the major averages are higher. The rate cuts in the pipeline plus a presidential election will go a long way to helping out the market in 2008, unless we get more inflation numbers like we saw last week.
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"The reason why a lower Fed Funds rate isn't helping the credit markets is that rates weren't too high to create tight lending conditions. Fear, uncertainty, and the re-realization of the existence of credit risk put the market into its present state, something that even a 1% Fed Funds rate would ameliorate significantly."
Your comment above is right on the mark. Interest rates were not the issue and the rates have been and still are low.
The "re-realization of the credit risk", as you put it, is more the truth. Wall Street was having a great ride, even better then the real estate industry.
But what is little known and reported is that most of the money that was put into the credit markets was credit. The Street was using credit to fund credit and if we look a little deeper into this we will find that the credit that funded the credit was also credit.
We have gone all too far with credit. Everyone, including our government is over exteded in credit. The old way of doing business on credit was not to purchase on credit way beyond your earning capacity and capacity to pay. It was for the ability to just borrow the money you HAD so as to use it for another 30 days and maybe earn some more with it. but 30 days later you paid it ALL back.
2008 should be an interesting year. The elections shouldplay a large part, the housing markets with play a huge part. As you said, when the Fed lowers the rate the stock markets get better.
Maybe it is all about the big money and not so much the average middle class person?
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