Begin forwarded message:
From: [EMAIL PROTECTED]
Date: September 14, 2007 12:18:40 AM PDT
To: [EMAIL PROTECTED]
Cc: [EMAIL PROTECTED], [EMAIL PROTECTED], [EMAIL PROTECTED]
Subject: Fed Encouraging Banks to Come Hat-in-Hand Begging for
Bailout Cash
Banks borrow $7.2 billion from Fed
Banks in New York, Cleveland, Richmond tap discount window
By Rex Nutting
MarketWatch, Sep 13, 2007
http://www.marketwatch.com/news/story/banks-borrow-72-billion-fed/
story.aspx?guid=%7BE692D620%2DB805%2D45C0%2D8A07%2D8D5D32F545AB%
7D&dist=morenews_ts
WASHINGTON (MarketWatch) -- In the first significant borrowing from
the Fed since it lowered the discount rate last month, U.S. banks
borrowed $7.2 billion from the Federal Reserve as of Wednesday, the
most since just after the attacks of Sept. 11, 2001, the Fed said
Thursday.
The average borrowing for the week was $2.7 billion per day <=$100
BILLION A MONTH>.
The Fed data don't detail the names of the borrowers. The data
indicate that $4.9 billion in loans were owed to the Federal
Reserve Bank of New York, $1.6 billion to the Cleveland Fed, and
$550 million to the Richmond Fed.
Last month, five big banks had borrowed from the discount window in
a symbolic show of support for the Fed. The borrowing from the
Richmond Fed appears to be a holdover from the symbolic borrowing
earlier.
By borrowing from the Fed at 5.75%, the move shows that several
U.S. banks could not obtain needed funds from other banks at the
federal funds rate, which closed at 5.18% on Wednesday and has
averaged 5.01% so far this month.
One analyst said the Fed had forced the banks to borrow the money
by deliberately squeezing reserves at the end of the two-week
maintenance period, when many banks must borrow funds to prove to
the Fed that they are holding adequate reserves against their capital.
"Most of this borrowing was forced," said Lou Crandall, chief
economist for Wrightson ICAP. The Fed was "deliberately stingy"
ahead of the expiration of the reserve maintenance period on
Wednesday, he said.
"It's like a game of musical chairs," Crandall said.
In essence, the Fed forced the banks that were left without enough
reserves to borrow at the discount window by temporarily pushing
the federal funds rate above the discount rate at the end of the
day on Monday, Tuesday and Wednesday, Crandall said. It was
cheaper for the banks to borrow from the Fed than to borrow from
other banks.
Crandall said that the high for the effective fed funds rate
touched 6.5% on Monday, 6% on Tuesday and 6.25% on Wednesday, above
the 5.75% discount rate.
Without much success until this week, the Fed had been encouraging
banks to use the discount window facility to bring more liquidity
into financial markets and to ease the credit crunch.
Forcing the banks to borrow from the discount window could be part
of the Fed's effort to get rid of the stigma that's been associated
with borrowing from the Fed. By making banks more comfortable with
discount-window borrowing, the Fed hopes its plan could still work.
"If the carrot won't work, use the stick," Crandall said.
Borrowing from the discount window has been rare except during
extraordinary times.
Such loans from the Fed typically carry a stigma because market
participants assume that only a desperate situation would compel a
bank to use the lender of last resort.
Last month, however, the Fed lowered the discount-rate penalty from
one percentage point to a half point, and encouraged banks to
borrow as needed to help flood the system with short-term cash.
Until this week, there was no evidence of any significant borrowing
from the Fed.
This week's borrowing could be related to the seizure in the
commercial paper market, said Mike Englund, chief economist for
Action Economics. Corporations that cannot roll over their own
paper are turning to banks for short-term funds.
Englund speculated that the banks that borrowed from the Fed this
past week could be using the Fed as the source of funds for these
backstop loans. Under new rules adopted a month ago, the Fed is
allowing banks to borrow at the discount window for 30 days at a
5.75% fixed rate.
There was some evidence Thursday that the credit crunch is easing,
at least in the very short-term commercial paper market, where
corporate securities average 45 days' maturity. The Fed said
outstanding paper fell for a fifth straight week, but at a much
slower pace than seen earlier.
Commercial paper levels are down $306 billion (13.8%) to $1.92
trillion in the past six weeks.
Rex Nutting is Washington bureau chief of MarketWatch.
-----------------
Northern Rock to get Bank of England bail out: reports
By John Letzing
MarketWatch, Sep 13, 2007
http://www.marketwatch.com/news/story/northern-rock-get-bank-
england/story.aspx?guid=%7B046233A6-3F96-40C8-8267-518F5058B7CF%7D
Troubled mortgage lender Northern Rock PLC will receive a bailout
from the Bank of England, according to media reports Thursday.
Northern Rock has struggled to finance its operations following the
spread of troubles in the subprime mortgage market in the U.S. and
a general tightening of credit markets over the summer, the BBC
reported, adding that the Bank of England's decision to intervene
came after consultation with the Treasury and the Financial
Services Authority.
The Financial Times reported on its online edition that the bailout
will take the form of short-term credit, "which will allow
[Northern Rock] to carry on operating."
The move may "help reassure thousands of the bank's customers that
their deposits are safe," the Financial Times reported.
Earlier this month, the Bank of England issued a statement that it
"is monitoring closely the evolution of both credit spreads and the
quantities of credit extended."
The BBC reported that on Wednesday, Bank of England Governor Mervyn
King said in a letter to the Treasury Select Committee that the
[central] bank is prepared to give emergency loans to financial
institutions encountering difficulties, "so long as those
difficulties were the result of temporary market conditions."
John Letzing is a MarketWatch reporter based in San Francisco.
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