Today's TIDBITS

March 17, 2008   

Market Believes Fed “Engineered” JPM’s Purchase of Bear Stearns

From RBSGC:  “As expected, Sunday evening proved to be a very interesting time. It was clear as everyone left for the weekend that the Fed was intent on getting something done with respect to Bear Stearns before the markets opened. Just as Asia was getting into the office, it was announced that JP Morgan Chase was buying Bear for the low low price of about $250 million ($2 a share). The Fed also let us know that the discount window line offered to JPM to prevent an unruly Bear liquidation will be as much as $30 billion. Reading between the lines of the various articles on the deal, my sense is that the Fed a) forced Bear to sell and to get it done over the weekend (shareholders may have preferred Chapter 11 or stringing the process out a few more days to getting $2 a share, but the Fed wanted market participants to know the score by Monday morning), b) wanted JPM to be the buyer rather than a hedge fund or a private equity shop (this way, the Fed has more oversight/control over the unwind process). There are two questions about the Fed's role in this episode that will be explored for many years. 1) Was it an appropriate exercise of the Fed's authority to force Bear to sell itself to JP Morgan Chase at such a rock-bottom price? The Fed's urgency to get something (anything) done before the Asia open clearly did Bear's shareholders no favors. In addition, while I know nothing beyond press reports, my sense from reading the newspapers articles is that the Fed basically told everyone else rooting around in Bear's offices over the weekend that JPM would be the buyer and the rest of you can go home. If we are lucky enough to be back to a relatively normal environment 6 or 12 months from now, JPM will probably have made a LOT of money off of this deal, with a huge assist from the Fed. Second, did the Fed's action do more harm than good? Did the Fed cause more panic by forcing a Bear deal at $2/share? It is interesting that 2-year Treasury yields sank after the news last night, in contrast to the past 3 or 4 times that the Fed has announced some new liquidity measure. Again, this will probably be debated for a long time.”

From Time:  “The last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system.  The Federal Reserve and the U.S. government swiftly approved the all- stock deal, showing the urgency of completing the deal before world markets opened.  Bear Stearns shares closed Friday at $30 a share. At their peak, the shares traded at $159.36…The deal marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29…After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal.  This is not the first time Bear Stearns has earned a place in Wall Street history. A decade ago, Bear Stearns refused to help bail out a hedge fund that was deemed "too big to fail." On Friday, the tables had turned, with the now-struggling investment bank in need of the same kind of aid. ”

From SunTrust:  “Lehman shares are off 35% today as investors fear additional write-downs will take the broker the way of Bear Stearns.”

History of Government Intervention in Markets During Times of Crisis

From Bloomberg:  “With Bear Stearns Cos.' temporary rescue in place, the $200 billion subprime crisis joins the history of government bailouts to preserve jobs, homes and savings when economic disaster looms.  Ever since Treasury Secretary William Gibbs McAdoo shut the New York Stock Exchange for four months in 1914, to prevent foreign investors from cashing out and throwing the U.S. into financial chaos at the outset of World War I, American policy makers routinely have suspended their support for free markets when confronted by economic peril.  ``I think the systemic risks dominate right now, which means you've got to put your finger in the dike,'' says William Silber, a finance professor at New York University's Stern School of Business…Bailouts can buy time while policy makers try to defuse panic…Just over 100 years ago, John Pierpont Morgan himself, the namesake of what was then known as the House of Morgan, came to the rescue when panic selling in October 1907 convulsed the New York Stock Exchange and threatened several banks and trusts.  Morgan, 70 and semi-retired, obtained an emergency pledge of $25 million from the U.S. Treasury. He persuaded New York's leading bankers and trust executives to put up another $25 million, after locking them in his library all night, according to ``The House of Morgan: An American Banking Dynasty and The Rise of Modern Finance,'' by Ron Chernow …By the force of his personality, Morgan restored order to the market. His intervention also convinced Congress and President Theodore Roosevelt of the need for a central bank.  Booms and busts define economic cycles, forming a familiar pattern to historians while surprising investors, policy makers and financiers.  Congress authorized $250 million in loan guarantees to rescue Lockheed Aircraft Corp. in August 1971, over the objections of the late Democratic Senator William Proxmire of Wisconsin. By today's standard, the stakes were small: about $1 billion in potential losses and 60,000 jobs.  The costs have risen steadily since, from the $1.2 billion in loan guarantees Congress provided Chrysler Corp. in 1979 to the $116.5 billion taxpayers spent to resolve the savings-and- loan industry's collapse by 1995.  The New York Fed averted a subsequent threat in September 1998 by persuading 14 banks to lend $3.65 billion to help unwind the leveraged trades of the Greenwich, Connecticut, hedge fund Long Term Capital Management. That was roughly equivalent to the $3.6 billion that the New York Fed loaned Chicago-based Continental Illinois National Bank & Trust Co. in 1984, in the largest rescue in U.S. banking history.

Yet the Treasury's shutdown of the New York Stock Exchange in 1914, a year after Morgan's death, remains one of the bluntest interventions by U.S. officials to head off a crisis. It is also one of the largest departures in American history from the capitalist creed of letting free markets sort out problems.  European investors held much of New York City's public debt. As foreigners cashed out, converting their securities to gold, the Treasury realized that its ability to maintain the dollar's link to bullion was being undermined, Silber wrote.  ``Treasury Secretary McAdoo succeeded in August 1914 because he did not hesitate to bludgeon the crisis with a sledgehammer,”…The decision served as a precedent for Franklin Delano Roosevelt, who closed the banks for a week on his first day as president in March 1933. When lenders reopened… depositors who had stood in line to withdraw their money queued up to put it back in.  On both occasions, Silber says, government policy makers offered more-lasting solutions to ease market fears. In 1914, McAdoo moved to increase agricultural exports, bringing foreign capital into the country. In 1933, Roosevelt offered federal loan guarantees during the bank holiday to stimulate credit.”

Questions Emerging About Fed’s Ability To Abate an Economic Downturn

From Bloomberg:  “Federal Reserve Chairman Ben S. Bernanke may be facing something worse than a loss of personal credibility on Wall Street and in Washington: waning faith in the ability of the institution he leads to turn around the economy and the financial markets anytime soon.  Bernanke has reached deep into the Fed's toolkit to come up with innovative ways to head off a recession and restore some calm in credit markets. While many have initially been greeted with rallies in stocks, cumulatively they haven't yet had lasting impact on bringing down credit costs and setting the stage for economic recovery…``Yet many of the problems facing us are beyond its reach.''  Home buyers are unlikely to put down offers on houses that they think will lose value -- no matter how much the Fed does to lower mortgage costs. Banks with mounting loan losses will shy away from lending to borrowers they think might go bust – no matter how much money the Fed pumps into the financial system. And investors will remain jittery -- even after the Fed throws a lifeline to struggling financial institutions, as it did last week with Bear Stearns Cos.  ``The Fed is attempting to catch some of the spillover and plug some of the holes in the system,'' says Louis Crandall, chief economist …Wrightson ICAP …the world's largest broker for banks and other financial institutions. ``But the amount of pressure in the system is still building and could exceed the Fed's traditional resources.''  Yesterday the Fed said it would provide financing for JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. for as much as $270 million after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm. The Fed also reduced the rate on direct loans to commercial banks by a quarter percentage point and said it will allow primary dealers to borrow at the rate in exchange for a ``broad range'' of investment-grade collateral. It extended the maximum term of discount-window loans to 90 days from 30 days…Financial markets are in ``uncharted waters,'' former U.S.  Treasury Secretary Robert Rubin said in a March 14 speech in Washington. ``The outlook for credit markets and the economy is uncertain'' and the government may need to take ``substantial additional action'' to help homeowners, said Rubin, now chairman of Citigroup Inc.'s executive committee.  Fed officials insist they aren't impotent and say they have moved to cushion a further weakening of the economy. They argue the economy and the markets would be worse off if the central bank hadn't cut interest rates and acted to relieve strains in the financial system…As stock and bond prices drop, banks demand more margin from borrowers, prompting them to sell assets to raise cash and driving prices even lower. At least a dozen hedge funds have closed, sold assets or sought fresh capital in the past month.  Finally, falling asset prices erode borrowers' net worth and make lenders even more reluctant to give them money.  Countrywide Financial Corp., the biggest U.S. mortgage lender, made no subprime loans last month, down from $2.6 billion in February 2007.  The housing market so far has proven resistant to the Fed's monetary medicine…Lawmakers acknowledge limits to the Fed's ability to aid the economy. Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, praises Bernanke as doing a ``very good job,'' while adding there is only so much he can do.   ``We have taken fiscal and monetary policy as far as they can go,'' Frank told the American Bankers Association March 12.

He unveiled legislation the next day to expand the government's role in helping homeowners avoid losing their houses.  Bernanke himself has tacitly admitted the Fed's leeway is limited by backing the $168 billion stimulus package passed by Congress last month and calling on banks to write down the principal on some of their mortgage loans.       ``We must be cautious in our expectations of what monetary policy can accomplish,'' Kansas City Fed President Thomas Hoenig said in a March 7 speech.”

From UBS:  “Last night’s announcement by the Fed of two more initiatives, in the same statement as the approval of the JP Morgan/Bear Stearns deal, does not appear to be inspiring much confidence in financial markets. Indeed, coming less than a week after the creation of the Term Securities Lending Facility, and nine days after the expansion of the TAF and increased repo operations, the limits of the Fed's influence on markets, in the short run at least, are increasingly clear. In the short run, markets are apparently continually re-assessing the negative fallout from the root cause of recent problems--declining home prices.  That said, presumably the Fed's actions have had some positive impact and without them markets would be showing even more weakness…In any event, the Fed is clearly in full crisis mode and is trying everything to prevent a collapse. At this point they have clearly lost the battle to prevent a recession and instead the goal is to limit the length and depth of the recession by limiting the fallout in financial markets.”

Old-Timers Worried This May Be Worst Recession Since at Least 1950s

From Bloomberg:  “Joseph Granville and Robert Stovall, octogenarians who've seen every financial market downturn since the 1950s, say the current one may be the worst and is far from over.  Granville, born in 1923, remembers his banker father's bad moods following the stock-market crash of 1929. The younger Granville began his career at defunct brokerage E.F. Hutton in 1957, quit in 1963 to begin publishing a weekly newsletter and wrote nine books on investing.  ``We're in a crash,'' Granville, 84, said … ``This is the worst I've seen, and I've studied every bit of history all my life.''  U.S. stocks plunged to the lowest since August 2006 today after JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. For less than a 10th of its market value sent financial shares falling around the world. The Standard & Poor's 500 Index neared a so-called bear market drop of 20 percent from its Oct. 9 record.  Bear Stearns, the fifth-largest securities firm and once the biggest underwriter of U.S. mortgage bonds, collapsed as the residential real-estate slump led to bank losses approaching $200 billion globally.  Stovall, 82, started out as a junior security analyst at E.F. Hutton in 1953 and ascended to head of research. He also held the posts of research director at Nuveen Corp. and director of investment policy at Dean Witter Reynolds Inc. before founding and running his own firm for 15 years and selling it to Prudential Financial Inc. in 2000.  He currently chairs the investment strategy committee at Sarasota, Florida-based Wood Asset Management, which oversees $1.6 billion.  Granville correctly forecast the bear market of 1977-78.  Later, he failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 before the so-called Internet bubble began.  On March 11, 2000, a day after the Nasdaq Composite Index peaked at 5,048.62, he wrote that investors in technology stocks ``will soon be burned.'' The index, which now gets 42 percent of its value from computer-related shares, sank 78 percent through Oct. 9, 2002…``With confidence at a low ebb, you wonder if this contagion will spread,'' Stovall said in a telephone interview from his office. ``We have to be concerned about the stability of the whole financial system.''

Falling Dollar Indicates Foreign Demand For U.S. Assets Shrinking

From The Wall Street Journal:  “The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts.  The unfolding financial crisis -- one that began with bad bets on securities backed by subprime mortgages, then sparked a tightening of credit between big banks -- appears to be broadening further. For years, the U.S. economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets.  No longer.  Recent days' cascade of bad news, culminating in yesterday's bailout of Bear Stearns Cos., is accelerating the erosion of trust in the longevity of some brand-name U.S. financial institutions. The growing crisis of confidence now extends to the credit-worthiness of borrowers across the spectrum -- touching American homeowners, who are seeing the value of their bedrock asset decline, and raising questions about the capacity of the Federal Reserve and U.S. government to rapidly repair the problems.  Global investors are pulling money from the U.S., steepening the decline of the U.S. dollar and sending it below 100 yen for the first time in a dozen years. Against a trade-weighted basket of major currencies, the dollar has fallen 14.3% over the past year, according to the Federal Reserve. Yesterday it hit another record low against the euro, falling 2.1% this week to close at 1.567 dollars per euro.  Lenders and investors are pushing up the interest rates they demand from financial institutions seen as solid just a few months ago, or demanding that they sell assets and come up with cash. Banks and Wall Street firms are so wary about each other that they're pulling back. Financial markets, anticipating that the Fed will cut rates sharply on Tuesday to try to limit the depth of a possible recession, are questioning the central bank's commitment or ability to keep inflation from accelerating.  There are other symptoms of declining confidence. Gold, the ultimate inflation hedge, is flirting with $1,000 an ounce. Standard & Poor's Ratings Services, a unit of McGraw-Hill Cos., predicted Thursday that large financial institutions still need to write down $135 billion in subprime-related securities, on top of $150 billion in previous write-downs. Ordinary Americans are worried: Only 20% think the country is generally headed in the right direction…"As a result, we're seeing capital flow out of the U.S."  That is a troubling prospect for a savings-short, debt-heavy economy that relies on $2 billion a day from abroad to finance investment. It is raising the specter of the long-feared crash in the dollar that could further rattle financial markets and boost U.S. interest rates.  Though the risks of an unpleasant outcome are worrisome, the effects of Fed interest-rate cuts and fiscal stimulus have yet to be fully felt by the U.S. economy. Moreover, the combination of a weakening dollar -- which remains the world's favorite currency -- and still-growing economies overseas is boosting U.S. exports and offsetting some of the pain of the housing bust and credit crunch.  But while cash continues to pour into the U.S. from abroad, this flow has been slowing. In 2007, foreigners' net acquisition of long-term bonds and stocks in the U.S. was $596 billion, down from $722 billion in 2006, according to Treasury Department data. Americans, meanwhile, are investing more of their own money abroad.  Hopes are fading fast that the U.S. economy was suffering from a thirst for liquidity that standard Fed remedies could quench. Former Treasury Secretary Lawrence Summers, speaking in Washington yesterday, said he sees "an increasing risk that the principal policy tool on which we have relied -- the Federal Reserve lending to banks in one form or another" -- is like "fighting a virus with antibiotics."…The loss of confidence is now spreading beyond the biggest banks, with their well-publicized losses on subprime and other risky assets, to regional and small banks. In the fourth quarter, U.S. banks reported their smallest net income -- a total of $5.8 billion -- in 16 years, according to the Federal Deposit Insurance Corp…A Wall Street Journal survey of more than 50 economic forecasters in early March found a profound shift toward pessimism: About 70% say the U.S. is currently in recession, and on average they put the odds that this recession will be worse than the past two mild, short recessions at nearly 50%. Most expect house prices to decline into 2009 or 2010.

This couldn't come at a worse time for U.S. homeowners. American household debt has more than doubled in a decade to $13.8 trillion at the end of 2007 from $6.4 trillion in 1999, the vast majority of it in mortgages and home equity lines, according to Fed data. But the value of U.S. householders' biggest asset -- their homes -- is now falling.”

Comparing Standards of Living Over Time

From The Chicago Tribune:  “Stuff is cheap. Really.  Yes, a gallon of gasoline is far more expensive than it was last year, but adjusted for inflation it costs about what it did in 1981. In fact, lots of things, such as clothing, electronics and restaurant meals, are, by historical standards, inexpensive.  In December 1978, newspaper ads listed a VCR at Sears for $795, more than $2,500 in today's dollars. A basic five-cycle washing machine? Back then, $319.95, which translates to about $1,000. It's cheaper now to enjoy an eight-day vacation in Honolulu.  So why do we feel so squeezed?  It's the reality of our new world order: Stuff is cheap, but the things that truly sustain us are not.  Globalization and efficiencies in distribution and retailing have cut production costs and consumer prices widely. Americans now spend about 10 percent of their income on food, down from 18 percent in 1958. But while prices have dropped, so have real wages.  Average weekly earnings in the private sector in 2007 were 15 percent below the 1972 peak in real terms, according to the Bureau of Labor Statistics.  Along with falling wages, we are paying more for benefits. Health insurance premiums rose 78 percent from 2002 to 2007, according to the Kaiser Family Foundation.  And we're spending a lot more on education. Yearly total costs at some private colleges now exceed the U.S. median household income.  As we earn less, we want more. In 1970, 36 percent of new homes were less than 1,200 square feet, the National Association of Home Builders reports. Today, 4 percent of new homes are that petite. One in 10 new houses was 2,400 square feet or more in 1970; 42 percent are that large now.  The want-more scenario is also the case with cars, which cost more even adjusted for inflation. A 2008, six-cylinder Honda Accord makes greater horsepower (268) than a 1990 Porsche 911 Carrera (247). The price of the Accord's power is gas mileage (19 miles per gallon in the city) that's not much better than that of the Porsche (16 mpg).  Because it costs less to produce things, and often costs less to buy them, many of us can easily afford items once considered luxurious. But things we once took for granted as affordable cost us dearly, and for many are out of reach.”

Princeton Economist Paul Krugman on the Housing Market

From Fortune:  “I think home prices will fall enough for us to produce about 20 million people with negative equity. That's almost a quarter of U.S. homes. If home prices are rising, or if there's positive equity, you can refinance or sell. But if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We're probably heading for $6 trillion or $7 trillion in capital losses in housing. Some fraction of that will fall on owners of mortgages. I still think the estimates people are putting out there - $400 billion or $500 billion in losses - are too low. I think there'll be $1 trillion of losses on mortgage-backed securities showing up somewhere… My preferred metric is the ratio of home prices to rental rates. By that measure, average home prices nationally got way too high. We'll probably basically retrace all that. So that's about a 25% decline in overall home prices. Only a fraction of that's happened so far. Of course, it varies a lot. In places like Houston or Atlanta, where home prices have not risen much compared with underlying rents, the decline will be relatively small. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines…. The effective borrowing costs for a lot of people are rising, not falling, despite the Fed cuts. The rising spreads are more than offsetting it. The mortgage rates have not been falling as you might hope. And, of course, for many types of people who were able to borrow two years ago, they now can't - at any interest rate. We're looking at the classic pushing-on-a-string problem, where the Fed can cut, but it's not clear it does much for the real economy.”

TIDBITS

From Bloomberg:  “National City Corp…fell the most in 24 years in New York trading, while Washington Mutual Inc., the largest U.S. savings and loan, fell to its lowest since 1995 on waning prospects for takeovers…The banks fell after JP Morgan Chase & Co.'s $240 million purchase of Bear Stearns Cos. removed one major buyer from the market.”

From Lehman:  “The NAHB housing index, which measures homebuilder sentiment, held steady at 20 in March. A decline in the Northeast to 21 from 23 and the West to 15 from 16 offset an increase in the South to 26 from 24. Among the components, buyer traffic, which jumped 3 points in February, remained unchanged at 19. The index of present sales held at 20 while the index of future sales fell a point to 26.  The housing outlook has remained bleak.”

End-of-Day Market Update: 

From Bloomberg:  “Treasuries rose and the three-month bill rate plunged to the lowest since the 1950s as the Federal Reserve cut the discount rate at a weekend meeting and backed JPMorgan Chase & Co.'s agreement to buy Bear Stearns Cos.  Gains in two-year securities drove yields to the lowest level in almost five years as the Fed reduced the rate on direct loans to banks by a quarter-percentage point to 3.25 percent.  Futures contracts on the Chicago Board of Trade show traders are betting the central bank will slash its target interest rate by at least 1 percentage point tomorrow from 3 percent.  ``It's very easy to see it's a flight to quality,''… Banks became more reluctant to lend today, according to the so-called TED spread, the difference between what companies and

the government pay to borrow for three months. It widened 8 basis points to 168 basis points, the biggest difference this year, before narrowing to 161 basis points. The spread has moved in a range of 90 basis points since Dec. 31, touching a low of 78 basis points on Feb. 12, when investor Warren Buffett offered to take on the municipal liabilities of three bond insurers.  Treasuries of all maturities have returned 4.6 percent in 2008, the best start to a year since 1995, as a meltdown in the market for mortgage-backed securities drove investors to the safety of U.S. government debt.”

From Bloomberg:  “…speculation that a U.S. recession will stall demand for raw materials…Oil retreated from a record, copper plunged the most in eight weeks and coffee dropped 11 percent. The Reuters/Jefferies CRB Index plunged the most since at least 1956… Demand for raw materials has gained as buyers in China used more grains, metals and energy products. Refined copper and alloy imports by China, the world's biggest user of the metal, fell 1.7 percent in the first two months this year, the Beijing-

based customs office said today.  Some investors are selling commodities to raise cash to

cover losses in equities… ``A lot of hedge funds have been up to their eyes in commodities this year,'' he said. ``It's been a very speculative play and so now they're getting out of it to cover margin calls and losses.''  Crude oil for April delivery fell $4.53, or 4.1 percent, to $105.68 a barrel in New York, after earlier reaching a record $111.80… Gold ended the day higher, after paring earlier gains that sent the metal to a record, as losses in equities and the dollar spurred demand for the precious metal as a haven.  ``In this sort of environment where people don't know what is going to happen, gold becomes a safe-haven alternative,''…”

From SunTrust:  “Emotion and fear have driven financial markets all over the board today. The market inside 2 years has been especially volatile. For example, the 3 month bill fell from a 1.15 to a low of .65, a level not seen since 1958. Then at auction time, the when-issued 3 month bill was trading at .94, only to see the stop-rate tail back to a 1.10. For Treasuries 2 yrs and longer, volatility has been no worse than recent days.  Current coupons throughout the curve have moved within a 10-15 bp range. Looking at markets as a whole, today could have been much worse. Equities are reasonably close to shore other than financials and commodities, which were hit hard. Mortgages and agencies are both trading with tighter spreads, which may be a slight positive reaction to the FED's actions.”

From Lehman:  “After a busy weekend that saw a discount rate cut, the introduction of a new Fed  lending facility for primary dealers, and the sale of Bear Stearns at a startlingly low price, the treasury market opened in disarray on Monday, and  rallied hard on the back of both flight-to-quality and mortgage buying… The yield curve flattened from 2s to 5s today even as investors were talking about the  possibility of a 100 bp cut from the FOMC tomorrow.  The fed, as we mentioned,  sold 2 year notes to dealers outright today, and perhaps the front end suffered  from fears of more of the same.  That threat did not seem to hurt 5 year notes,  though, which were the instrument of choice for buyers for the second straight  day.  5s outperformed 2s and 10s by over 5 basis points on the day…”

From UBS:  “Treasuries rallied across the board as fallout from the Bear Stearns situation fed a general sense of panic, with financial stocks taking it on the chin. The belly of the curve outperformed, and 3-month Treasury bills traded at their richest levels in more than 50 years when the briefly traded at 0.65%... With the energy complex taking a beating and crude down nearly $7/barrel at its lows, TIPS lagged badly. Breakevens narrowed at least 15bps across the board, and the January 2009 breakevens tightening a whopping 37bps on top of Friday's 32bps compression. Even so, Treasury volume was a surprisingly light 85% of the 30-day average… the Financials were pounded yet again despite the impressive late day comeback in the DJIA. Commodities took a bath as the CRB fell by -4.7%-- the biggest drop in over 50yrs according to Bloomberg…Swap spreads surprisingly collapsed tighter today despite the rising fears about liquidity and solvency. We saw good paying in the belly and front end on both rate and spread--despite tighter spreads.  Agencies saw light flows save for one committed seller and Agency bullets generally traded in line with Swaps. Mortgages saw better buying all day, with FNMA 5.5's getting to as much as a point tighter to Treasuries. After some late day profit taking, they went out some 27 ticks tighter to treasuries.”

Three month T-Bill yield fell 16 bp to 1.00% 

Two year T-Note yield fell 13 bp to 1.35% 

Ten year T-Note yield fell 17 bp to 3.30% 

Dow rose 21 to 11,972  

S&P 500 fell 11.5 to 1277  

Dollar index 0.20 to 71.45

Yen at 97.44 per dollar 

Euro at 1.573

Gold rose $1 to $1004

Oil fell $4.01 to $106.20 

*All prices as of 4:53 PM