financial markets and the fed

The Fed has now become the lender of last resort to the entire financial system, not just the bank holding companies that it normally regulates. This is a landmark event in Global central bank monetary and economic policy. The Fed as a lending last resort has fundamentally altered the on-the-ground reality of counterparty risk, and this will forever change the environment in which investment banks operate. . At the end of this mess the regulatory environment governing the financial sector will be dramatically different from what we have now. While many on Wall Street may like the safety that the Fed provides as a lender of last resort, many on Wall Street will not like the changes that are coming. Central banks globally will fall in behind the feds regulatory framework and this has massive implications for Australian financial and property equities

Let's analyze the situation more closely. The Fed has rescued an entity with almost $30bn in credit and the entity is not regulated by the Fed. Remember BS is regulated by the SEC. The SEC's required capital levels are roughly a third of what the Fed requires of the commercial banks it regulates. The Fed has taken these steps because of its concerns over counterparty risk.

We will soon learn that the Fed has learned its lesson when it comes to counterparty risk. Such risk will have to be managed much better by banking regulators around the globe. This will bring an end to the free-wheeling days of fixed income derivatives. Regulated settlement and clearing processes are coming and the Fed/Treasury will be driving these changes not the ISDA, the SEC, or the broker dealers themselves.

Fixed income derivatives are likely to go the way of other securities markets. This means they will be non-levered hedging and speculation tools. Leveraging through derivatives will probably end with an order from the regulators against such actions.
The Fed explicitly recapping financial institutions by directly injecting equity or taking over the institution via proxies like JPM.

The days are gone when an independent investment bank could have a large trading book and this has major implications for the markets as the books are unwound. The Fed will ensure that if it is required to bailout such institutions, not having regulatory of capital jurisdiction over such entities would be totally unacceptable.

There is no real way for the investment banks to opt out of the protection that the Fed has now extended because ALL investment bank are subject to counterparty risk in the financial marketplace.

Investment banks will turn into banks, through consolidation driven by non-stressed, distressed, or regulatory realities. Under this new regulatory system Goldman Sachs, with its large trading book, is no longer the model investment banking and JP Morgan now assumes that title. JP Morgan is the correct model to the Fed in an "everybody is too big to fail" regulatory regime.

As a result of this new regulatory regime, a big round of consolidation among financial services is coming in the U.S. and probably globally.The regulators are about to burn and pillage the investment banking community. If BS is too big to fail and the Fed has to provide $30bn in effective equity in a bailout then what large financial institution is a credit or a counterparty risk? Answer NONE of them are.

Effectively the global leveraged derivative market is about to unwound in fact all leverage will be regulated to a differing extent. The next round of regulation is going to be the mother of regulatory regimes. This unraveling of leverage and the process that involves will lead to a protracted US depression and in my view the eventual default of the US governments obligations in 2-3 years from now.

Just like the Bank of England defaulted in the 30s the US government risks default. While this is wildly speculative the current actions by the Fed lead us in that direction

If you move to other industries like the auto industry exactly the same circumstances prevail. Sub Prime Auto supported GM, Ford and Chrysler in much the same way as Sub Prime Mortgages supported the real estate bubble. When say GM fails (and they are very likely to) who will take care of the counter party risk related to GM debt that is now 10 times larger than the actual GM debt?

Debt servicing levels of Aust companies are 32 year highs, Commercial and Residential property are about to bust.

All risk is to the downside for Financial s and Property for sometime to come.