Whipsaw, yo-yo, see-saw say the commentaries this morning. In fact it’s just plain volatility ahead of the Senate vote on the new strings-attached-mother-of-all-bailouts Bill tonight at 8pm London Time. The expectation is that the modified plan will pass as it has the backing of most of the key movers and shakers on Capitol Hill. The sweeteners for reluctant free market Republicans and Democrats looking for re-election are:

• an increase in FDIC deposit insurance protection to $250k (from $100k),
• a tax break extension for two years (an alternative minimum tax which applies to corporates and individuals) said to be worth $62bn,
• a possible easing up on the need for “mark-to-market” accounting (see below),
• suspension of capital gains tax for 2 years.

Reports are that some of the above points are part of a Republican alternative to the Paulson Plan A, so the situation is a little hazy and confused (two words the market doesn’t generally take kindly to.)

Anyway welcome to quarter four. It seems odd to have made it through a 24 hour period without anyone going belly up or getting taken over.

Today’s Market Moving Stories

• The Irish government passed the emergency bill to guarantee the 6 major DOMESTIC financial institutions. National Irish Bank and Ulster Bank (who are owned by Danske and RBS respectively) are not covered by the scheme and appear less than chuffed. The UK press is reporting heavy flows of funds into Irish institutions. This guarantee gives Irish banks a significant competitive advantage in terms of funding. The attached strings are that it appears that the government will have the power to take shareholdings and force through mergers in banks availing of the novel scheme. Expect other European countries (Spain, France??) to follow suit.
• Sad to report that J.C. Trichet still doesn’t seem to have grasped the enormity of the crisis. In a keynote speech yesterday he drew a clear distinction between the liquidity functions of the ECB (being lending for last resort) and the rate setting policy (which is aimed PUERLY at price stability). This squarely rules out whatever slim hope there was of a surprise rate cut from the Frankfurt ivory tower merchants tomorrow.
• Japan’s key bellwether Tankan survey fell 8pts to –3. This is the worst reading on this survey of business sentiment in 5 years and will spark concerns on the growth outlook.
• A JP Morgan analyst report just released sees European banks having to make a further €40bn in write downs (Soc Gen €2.6bn, Deutsche €4.5bn, UBS €2.7bn, Barclays €3.7bn and MOST INTERESTINGLY, Lloyds €5.7bn! Ouch!)

How To Gauge If Things Are Getting Better Or Worse.

Probably the best measure of the distress in the market is but something known as the TED spread. Now bear with me. The spread shows the difference between where the U.S. Government can fund for 3 months and where banks in the inter-bank market can fund. The yield at which the U.S government can fund has dropped dramatically as people rushed for the safe haven of anything with a state guarantee on it. But the interest rate that banks are willing to lend to each other has soared despite MASSIVE flooding of cash markets by global central banks. Result, the TED spread has boomed to a new high of just over 350bps.

Here’s Another Fine Mess You’ve Gotten Us Into
The daftest thing I’ve heard in a long time is the proposed SEC (FASB) rule change which would effectively allow banks to move away from what is called “mark-to-market” accounting i.e. if you bought something for a $100 and the market price is now $40 that’s where you have to value it. This is said to be part of the problem. Excuse me but if you go to the doctor and he/she tells you that you have a serious ailment and that without radical treatment / surgery you are going to die in six months you don’t blame him. This is a crazy bit of voodoo economics and another move on the road to serfdom. AIG is thought to be the big winner under any such move.

Equities

• HBoS shares are lower on rumours that Lloyds will re-price their bid. I did think it looked a bit top end the day the news broke.
• Rating actions overnight saw Depfa / Hypo Real Estate downgraded as there is a serious question mark over their business model. Dexia were also docked 2 notches.

Drawing Breath
The change we have already witnessed in the financial landscape is almost unbelievable. Here’s a link where you can keep track of all the bank failures and takeovers to date.