A couple things to add about today's problems in the banking sector:
The government's plan to prop up Freddie Mac and Fannie Mae looks as if it's helping (even though their shares aren't likely to get any boost). But it doesn't really fix entrenched problems in the economy. Namely, the overarching theme of today's bad market: America's worsening credit profile.
1) The other shoe is falling at regional banks.
Shares of National City and Washington Mutual are down more than 25 percent today following the failure and seizure of IndyMac by regulators over the weekend. Bank failures are expected to rise, and given IndyMac's magnitude (it's the biggest failure since the 1980's S&L crisis), investors are fearfully pondering which one might be next.
All of this prolonged trouble in banking brings us to a broader worry:
2) Foreigners might finally be taking notice.
Kim Rupert, who watches global fixed income at Action Economics, says today's Treasury auction of three- and six-month bills had the lowest amount of indirect bidding (seen as a proxy for foreign central banks) since August 20, when the credit crisis began in earnest.
That's a problem, because keeping foreign demand up is a very big deal for the U.S. economy.
As Merrill Lynch's Alex Patelis notes, foreigners now own some $1.5 trillion worth of securities backed by agencies and government-sponsored enterprises (like Fannie and Freddie). They're especially popular with surplus-heavy central banks like China's.
Given the latest round of terrible news from the mortgage sector, he asks:
Are they going to be comfortable continuing to lend to US agencies at current terms? Who knows, but one by one, the allure of US investments is slowly being chipped away.
So if American debt becomes unattractive, what do foreign governments do? Merrill sees currency appreciation (bad for the dollar), higher interest rates (bad for exports in an already slow U.S. economy), and more non-U.S. investments (bad for credit-crunched American business).