Breaking: Bear shits in woods! Pope reputed to be Catholic! On 12/13/07, Charles Brown <[EMAIL PROTECTED]> wrote: > > A forwarded post. > > John Henry > > Fed IS footing bill for lenders' crisis (that is, they will make us pay > for it) > > > > December 12, 2007 > Fed Leads Drive to Strengthen Bank System > By FLOYD NORRIS and VIKAS BAJAJ > A day after the Federal Reserve disappointed investors with a modest > cut in > interest rates, central banks in North America and Europe announced on > Wednesday the most aggressive infusion of capital into the banking > system > since the terrorist attacks of September 2001. > > Stocks initially surged around the world when the coordinated move was > announced by the central banks, though markets in the United States > gave up > nearly all those early gains in afternoon trading. The action is being > led > by the Fed, which this month will lend $64 billion itself and through > banks > in Europe, and includes the backing of the Bank of Canada, the > European > Central Bank, the Bank of England and the Swiss National Bank. > > The injection of new capital into the market suggests that policy > makers are > increasingly concerned about the stability of the credit markets, which > have > seized up again in the last couple of weeks after they overcame an > earlier > bout of panic in August and September. Economists and market > specialists say > policy makers are trying to reassure bankers that they will stand firm > as > the lender of last resort. > > "This is basically a reinsurance policy, it's not an insurance policy," > said > William H. Gross, the chief investment officer of Pimco, the > bond-management > firm. "They are saying, 'We will stand behind you.' " > > Mr. Gross added: "Now it's up to the private market to gain a little > confidence and turn a little macho and start performing on its own." > > Fed officials said the move was an effort to improve financial markets, > not > a response to problems at specific banks. "This is not about > particular > financial institutions with particular problems," a senior Fed official > told > reporters in a background briefing. "It is about market functioning." > > Economists and market specialists generally welcomed the Fed's > intervention > but expressed some skepticism whether it would be enough to allay the > biggest problems in the credit markets related to problems in the > American > housing market, where home prices continue to fall and mortgage > securities > are plagued by rising defaults and foreclosures. > > "They do not address the underlying imbalances threatening the world > economy > - notably the impact the U.S. housing slump will still have via > conventional > economic channels," said Julian Jessop, chief international economist > at > Capital Economics in London. "But they should at least reduce the risk > that > the credit crunch tips economies into recession." > > When markets are functioning properly, banks easily and regularly > borrow > money from each other at rates that are slightly higher than what, say, > the > American government borrows at through Treasury bills. The banks are > acting > like homeowners who borrow against the value of their homes, but in > the > banks' case they are putting up securities they own as collateral. > > But with markets increasingly uncertain about the quality of bank's > holdings > - the home loans in their mortgage securities are defaulting at a high > rate, > for instance - lending between banks has slowed and become much more > expensive. > > The difference between what banks pay to borrow and what the Treasury > pays, > for instance, has jumped from less than half a percentage point to more > than > 2.2 points on Tuesday. By stepping into the breach and lending directly > to > banks, policy makers are hoping to tamp that premium back down. > > At its meeting Tuesday, the Fed lowered its target for the federal > funds > rate, the rate banks normally pay on loans to each other, to 4.25 > percent. > And it lowered the discount rate, the rate at which the Fed will lend > to > banks on loans secured by virtually any collateral, to 4.75 percent. > Share > prices fell after that announcement amid disappointment that a larger > cut > was not made. They recovered their losses Wednesday during some wide > swings. > > The Standard & Poor's 500-stock index, which gained more than 2 percent > at > one point in the morning, was down 0.3 percent late in the day and > then > ended up 8.94 points, or 0.6 percent, at 1,486.59. The Dow Jones > industrial > average climbed nearly 270 points early on, then reversed course and > was > down more than 110 points. It finished up 41.13 points, or 0.3 percent, > at > 13,473.90. > > Fed officials said the announcement had been in the works for some > time, but > could not be announced Tuesday because the central banks wanted to make > the > announcement when all their markets were open. > > "Market reaction yesterday had nothing to do with today's > announcement," > said a senior Fed official. "This was a global effort among a number > of > central banks. We wanted to announce that together. We couldn't have > announced that yesterday as Europe was closed" when the Fed announced > its > action. > > The Fed also said it was making available funds to allow the European > Central Bank to lend $20 billion and the Swiss National Bank to lend > $4 > billion to European banks that needed to borrow dollars. > > The first auction of $20 billion was scheduled for next Monday, > followed by > another auction of $20 billion on Dec. 20. The third and fourth > auctions > will be on Jan. 14 and 28. > > The Fed said that the new auction process should "help promote the > efficient > dissemination of liquidity" when other lines of credit were "under > stress." > > The experience gained from the four scheduled auctions would be > "helpful in > assessing the potential usefulness" of this new process to provide > funds to > banks in the United States, the central bank said. > > Since the global credit crunch hit with force in August, central banks > as > well as the Federal Reserve have been injecting large amounts of money > into > the banking system in an effort to keep credit flowing. Nonetheless, > loans > have been hard for many to obtain. > > The auctions held by the Fed will set interest rates on borrowings by > banks > from the Fed. The banks will be able to post a wide range of > collateral, > including illiquid securities like collateralized debt obligations, as > they > now can do at the discount window. But while it often becomes known > which > banks borrow at the discount window, the auction procedures are > intended to > keep the identities of the borrowers secret. > > "There is no reason to believe there would be stigma associated with > the use > of this facility," said the senior Fed official. > > In Frankfurt, the European Central Bank said it would offer banks in > the > 13-nation euro area up to $20 billion to help cover their > dollar-denominated > liabilities. > > "The general objective is to address elevated pressures in the > short-term > money market," Lucas D. Papademos, an E.C.B. vice president, told > reporters. > > He said the bank hoped to reduce the difference between overnight loan > rates > and those for three-month and six-month periods, which have remained > stubbornly elevated as banks and other financial institutions have > stepped > up their cash hoarding toward the end of the year. > > After relaxing somewhat in September and October following great > turmoil in > late summer, credit markets have grown tense since mid-November. > > Demand for credit often runs higher toward the end of the year, but > this > year banks are also building up liquidity cushions to guard against > further > losses linked to the deteriorating mortgage market in the United > States. > > "The most positive aspect is that this is a new response to a problem > that > seemed to remain intractable," said Marco Annunziata, the London-based > chief > economist for UniCredit. "It will probably not be the silver bullet, > but it > should allow us to move forward." > > Floyd Norris and Vikas Bajaj reported from New York. Carter Dougherty > contributed reporting from Frankfurt. >
-- Sandwichman
