After the initial fanfare and hype, the markets gave the thumbs down to the belated passing of the TARP bailout plan last Friday. This damning verdict shows the consequences of delaying and diluting the original admittedly flawed proposal. Simply put it had no “shock and awe” left to give the market a lift. Beg, borrow and bailout.

These are hard times and it could be an exceptionally ugly today as there is more than a whiff of panic around. Indeed as I write, European markets are being crushed. So much for that short-selling ban.

Overnight News and Today’s Market Moving News… Information Overload!

• The German government and bank regulator managed to cobbled together (with much arm twisting) a €50bn emergency facility for Hypo Real Estate Bank. It emerged that the earlier facility of €35bn was going to prove insufficient to meet their funding needs.
• To head off a bank run at the ATM machine, the German government announced that all private deposits (which are estimated to be €570bn) are to be fully guaranteed by the Federal government. There was no explicit expiry date specified when this guarantee expired unlike the Irish scheme (2 years). Austria and Denmark have followed suit. This piles the pressure on the UK government to come up with some sort of similar scheme to prevent a further outflow of funds from British banks. My view is that they should guarantee interbank lending as I feel this is the only measure which could potentially thaw the frozen money markets.
• The meeting of European leaders on Saturday broke up unsurprisingly without any Pan-European agreement on a bailout fund similar to that in the US. Further ad hoc on the hoof unilateral national responses seem to most likely outcome as the crisis unfolds locally.
• French bank BNP Paribas is to buy troubled Belgian bank Fortis’s operations in Luxembourg and Belgium for €16.5bn, while the Dutch business is to be nationalized. Watch out for more news of the fate of under pressure Dexia and Italy’s Unicredit who both limped into the weekend. Unicredit looks set to try and raise €6.6bn in capital.
• Meanwhile the crisis in Iceland looks like threatening the solvency of the country, never mind the banking system. They need a “dig out” from other Scandinavian governments.
• Denmark’s Danske bank, who own NIB, put out a profits warning over the weekend in a separate development.
• ECB council president J.C Trichet and members Wellink and Nowotny all spoke over the weekend and did little to quell the expectations of a rate cut from the in November.
• The WSJ is reporting that Wachovia may be split between Wells Fargo and Citibank. Wells Fargo had attempted to steal the much maligned Wachovia from under the noses of Citibank who had then gone to court to stop the deal.
• Asian markets are under EXTREME pressure.

The Law of Unintended Consequences
Well meaning interventions in markets often have very surprising unintended negative consequences. Take for example the Basel accord on banks capital adequacy ratios. This was meant to ensure that banks had sufficient capital according to their risk-weighted assets. But what happened? Well the poacher will always outwit the gamekeeper. Banks bypassed these rules by creating vast SIVs (structured investment vehicles), which in many cases, ended up dwarfing the equity base of the bank. So we ended up with “regulated” banks that were more highly geared and leveraged that an unregulated hedge fund! What are the far unseen unintended consequences of the TARP?

Tobacco Companies Can’t Even Get Money
Tobacco companies are seen as recession proof, strong in tough times. Operating margins can run above 20% and cash flow is stupendous. But Altria (formerly Philip Morris) have decided to delay its buyout of US Smokeless Tobacco. The credit markets have been mauled to the extent that the banks helping finance the deal have suggested it be delayed until early next year. This is the clearest sign to me of how access to credit has fallen in the last two weeks. The message is that no deal, no matter how credit-worthy the firms involved may be, is going to get done over the next quarter.

The markets should have seen the announcement coming. The 10% coupon that GE and Goldman Sachs had to pay Warren Buffett for money was remarkable evidence of how expensive cash is for even iconic American firms.