Real Drama following Rescue Bill Setback is in the Money Markets

donsutherland1 · 09-30-08, 07:20 AM

In the wake of the House's defeat of the financial system rescue legislation, stocks dove yesterday. Today, stocks could rebound as the word coming from Capitol Hill is that the House's vote essentially delays a financial system rescue package but it does not kill prospects for such a package. Expectations have been reaffirmed that Congress will not recess until such legislation is passed.

Nevertheless, even as stocks take comfort from the latest news from Washington, the real drama continues to play out in the money markets. That's where the liquidity and lending droughts continue to deepen. That's the issue the financial system rescue package was intended to address. If not addressed, the risk of a systemic financial crisis will likely increase.

Some highlights from overnight:

From Bloomberg.com: Money-market rates jumped in Europe today, with lenders hoarding cash as the third quarter ends. Rates on three-month loans in dollars were as high as 10 percent as of 10:50 a.m. in London, said Ronald Tharun, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart.

Also from Bloomberg.com: The cost of borrowing in dollars overnight jumped the most on record, the British Bankers' Association said.

The London interbank offered rate, or Libor, rose 4.31 percentage points to 6.88 percent, an all-time high, the BBA said today. It was at 2.95 percent a week ago.

From CNBC: Overnight dollar funds changed hands above 8 percent at one point in Asia, four times the Fed's target for overnight rates, traders said.

With the lifeblood of the world's financial system congealing, analysts said central banks may now have to view the money market strains as a threat to the global economy.

From Reuters: Dexia... became the latest bank to need a big bailout.

MC.no.spin · 09-30-08, 07:47 AM

I would expect Bernanke to lower the Discount Rate in an effort to improve this situation. This article mentions some other tools:

Quote:

Existing Laws Give Fed and Treasury Some Options

Posted 51 minutes ago
By Debra Cassens Weiss

With Congress' refusal yesterday to approve a $700 billion Wall Street bailout, the Federal Reserve and the Treasury Department are using existing options to shore up confidence in the financial markets.

Yesterday the Fed announced it would add an extra $150 billion to an emergency lending program for banks, and an additional $330 billion through so-called swap lines with foreign central banks, the New York Times reports. The Fed’s activities are financed with supplemental securities created by the Treasury Department.

A Depression-era law gives the Fed power to lend money to companies it deems too dangerous to fail, the story says. And the Treasury Department has authority under a housing bill passed this summer to buy up mortgage-backed securities.

The Wall Street Journal Real Time Economics Blog identified the Depression-era law as Section 13-3 of the Federal Reserve Act, in a story published earlier this year.

Despite these powers, Treasury Secretary Henry Paulson maintains “our toolkit is substantial but insufficient.”

Existing Laws Give Fed and Treasury Some Options | ABA Journal - Law News Now

donsutherland1 · 10-06-08, 07:22 AM

Following high drama concerning major banks in Germany, Belgium, and Iceland this weekend, short-term interest rates remained elevated. As an indication the the financial sector crisis could be deepening, the overnight LIBOR rose.

Highlighting the continued deepening of the credit drought, Bloomberg.com reported:

Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month's downfall of Wall Street titans: its spread to corporate America and state and local governments.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle. California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up...

The central bank has power to extend credit to any company under "unusual and exigent circumstances." It already used that authority this year to avert the failure of Bear Stearns Cos., take over American International Group Inc. and lend to banks to shore up money-market funds.

donsutherland1 · 10-06-08, 08:46 AM

On account of the worsening credit crunch, the Federal Reserve announced a dramatic expansion of its Term Auction Facility (TAF) program. The Federal Reserve's press release stated:

Quote:

The sizes of both 28-day and 84-day Term Auction Facility (TAF) auctions will be boosted to $150 billion each, effective with the 84-day auction to be conducted Monday. These increases will eventually bring the amounts outstanding under the regular TAF program to $600 billion. In addition, the sizes of the two forward TAF auctions to be conducted in November to extend credit over year end have been increased to $150 billion each, so that $900 billion of TAF credit will potentially be outstanding over year end.

FRB: Press Release--Board announces that it will begin to pay interest on depository institutions required and excess reserve balances--October 6, 2008

American · 10-06-08, 10:10 PM

Maybe the "rescue package" is the big BS some said it was.