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Friday, March 7, 2008

Still More Liquidity

Fed Boosts Lending to Banks as Credit Rout Continues (Update3): “The Federal Reserve plans to boost the amount of loans it plans to make to banks this month to offset a deepening credit crunch threatening to tip the U.S. economy into a recession.

The central bank increased the size of auctions of four- week funds to banks planned for March 10 and March 24, to $50 billion each from $30 billion previously. The Fed also said in a statement in Washington today that it will make $100 billion available through repurchase agreements.

The decision is the central bank's latest attempt to reduce the threat to the economy from banks curtailing loans to companies and households. Banks and securities firms have posted losses exceeding $181 billion since the start of last year as the impact of surging defaults on subprime mortgages rippled through world financial markets.”

Not familiar with the TAF (Term Auction Facility)? No problem. Everything you ever wanted to know about the TAF.

“Money market rates are again rising as banks hoard cash. Borrowing costs had fallen earlier in the year after the Fed, Bank of Canada and European central banks announced plans on Dec. 12 to counter the squeeze through special auctions and swap agreements.”

Uh oh. I mentioned LIBOR and EURIBOR spiking two days ago and again yesterday in Ambac ‘Bailout’: Why Bother?

Euro Rate Surges as Euribor Hits Seven-Week High (Update3): “The cost of borrowing euros for three months rose to the highest level in seven weeks, adding to evidence central bank attempts to ease a shortage of cash in the money markets are misfiring.

The euro interbank offered rate, or Euribor, for the loans climbed 7 basis points to 4.50 percent today, the European Banking Federation said. It was the biggest gain since Jan. 25. The one-week rate was little changed at 4.11 percent.

The Federal Reserve said today it will increase the amount of cash available at two auctions this month to $100 billion, citing “heightened liquidity pressures.” Money-market rates are rising as banks hoard cash after at least $181 billion in credit losses and writedowns linked to the U.S. subprime- mortgage crisis since the beginning of 2007. Credit defaults showed bank debt has become more risky than corporate bonds.”

Despite massive rate cuts and a massive liquidity injections, NOTHING has been solved.

“A joint plan by the Fed, ECB, U.K., Swiss and Canadian central banks announced on Dec. 12 had driven down borrowing costs earlier this year. The ECB injected a record $500 billion into the banking system on Dec. 18. The Fed provided $160 billion in short-term loans since mid-December in six auctions through the Term Auction Facility, or TAF.

The Fed said today it will increase the amount of its March 10 and March 24 TAF sales to $50 billion each from $30 billion each and boost them further “if conditions warrant.”. The Fed also said it will initiate a series of 28-day term repurchase agreements.”

Another sign of financial stress is the TED spread:

“The difference between what banks and the government pay for three-month loans has also indicated an increased reluctance to lend. The so-called TED spread has risen 42 basis points to 1.63 percentage point this week.”

Can you say foreshadowing? LIBOR and EURIBOR were pretty prophetic back in December… and we all know what happened in January. We WILL test the lows in all major equity indices… The Big Test is Pending.

Related Headlines:
Carlyle Group Scorched by Mortgage Fund's Stumble (Update1)
Bank Debt More Risky Than Corporate Bonds, Default Swaps Show