Posted on 05/02/2008 11:38:21 AM PDT by Ernest_at_the_Beach
Washington - The US Federal Reserve in a joint effort with the European and Swiss central banks on Friday expanded lending to banks struggling to raise capital amid an ongoing financial crisis. The Fed increased its offering through a bi-weekly Term Auction Facility - first created in December to help investment banks boost liquidity - from 50 billion dollars to 75 billion dollars.
The European Central Bank (ECB) boosted its own bi-weekly auction offering from 15 billion dollars to 25 billion dollars. The Swiss National Bank (SNB) said it would begin offering bi-weekly auctions of up to 6 billion dollars.
It is the latest in a series of measures taken by central banks to help financial institutions deal with billions of dollars in writedowns stemming from a mortgage-market meltdown that began in August.
The US central bank also widened the type of collateral it accepts from banks, including some bonds backed by student loans that have been hit as the mortgage crisis spreads to other sectors.
The banks in a joint statement said their latest action was taken "in view of the persistent liquidity pressures in some term funding markets."
The Fed has made nearly 500 billion dollars in Treasury securities available to investment banks and other lenders struggling to boost liquidity and already auctioned off about 200 billion dollars.
The expansion of the Term Auction Facility will increase to 150 billion dollars the amount still being offered up for auction under the programme. The Fed's TAF was first unveiled in December at a level of 40 billion dollars per month.
The Fed also expanded its currency swap lines with its two European counterparts, from 30 billion dollars to 50 billion dollars with the ECB and doubling its exchange with the SNB to 12 billion dollars.
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The Motley Fool ^ | February 26, 2008 | Morgan Housel
Posted on Thu 28 Feb 2008 09:42:39 AM PST by AdamSelene235
Banking is one of our economy's most important players, financing the aspirations of everyone from homeowners to private-equity titans. Since last summer, the weakening collateralized debt market has mired the banking industry in one of the stickiest spots it's seen in decades. So when Fed chairman Ben Bernanke was faced with the possibility that panic in the banking industry might turn an ugly problem into an outright catastrophe, he sprung into action in ways we've never seen.
A bit of background Banks must keep specific amounts of cash on hand, called required reserves, to ensure that they can meet customers' withdrawal requirements. Money flows in and out every day at different levels, so when some banks fall behind, those with deeper pockets loan money out and cover the difference. Bank of America (NYSE: BAC) can lend to Washington Mutual (NYSE: WM), JPMorgan (NYSE: JPM) can cover Wachovia (NYSE: WB), and so on, until everyone is squared up at the end of the day. It's like the corporate version of a hippie commune.
But when money gets really tight, and lending between banks falls short, the Fed steps in and acts as a lender of last resort. It loans banks money through what it calls the discount window, albeit at a higher rate than banks charge each other. It really is last resort, because relying on the Fed for money is the equivalent of asking your parents for a loan; it doesn't exactly instill confidence in your financial well-being.
Uncle Ben to the rescue! When banks hit a logjam in December, Bernanke faced quite a bind. Interbank lending slowed as market uncertainly grew, yet banks were reluctant to use the discount window, for fear that the banking industry's health as a whole would be called into question. Their options were running low. Bernanke's solution: the term auction facility.
Term who? The term auction facility, or TAF, isn't too different than the standard discount window. It just allows the Fed to lend predetermined amounts of money, and let the banks bid on the interest rate. Most importantly, it doesn't come with the stigma of the discount window, which threatened further panic.
The Fed wasn't shy about how much money it was willing to front. A recent article in the Financial Times revealed that banks borrowed around $50 billion from the TAF as of mid-February. That's a lot of money, even for big banks. The latest round of loans, earlier this month, totaled $30 billion at 3%.
Update on the TAF- Term Auction Facility
http://www.ft.com/cms/s/0/ac5a582c-1846-11dd-8c92-0000779fd2ac.html
This money will be used to increase the supply of dollars offshore in Europe.
Both moves are designed to target the high spreads in the interbank money market, which have not eased in recent weeks in spite of the progress in some other credit markets.
The Fed believes that many of the strains in the dollar money markets reflect pressure from European banks that are structurally short of dollars.
Analysts said the Federal Reserve’s increase in the TAF and larger swap lines with other central banks suggest they now believe this is the best way to tackle stubbornly high interbank rates.
”After throwing everything and the kitchen sink against this financial crisis, the Fed has found what works best and is building on it,” said TJ Marta, fixed income strategist at RBC Capital Markets.
”It provides more impetus for markets to shift their focus from the financial market crisis to the real economy downturn.”
Just posted this....(I think it might be the news of theday):
Fed expands auction, accepts wider collateral ( bonds backed by auto loans and credit cards.???)
NEW YORK (MarketWatch) -- The Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards.
http://events.startcast.com/events/199/B0003/#
According to Don Coxe, (my highest recommendation for market commentary: updates every Friday) S&P has now “rethunk” their estimates of recovery on SENIOR TRANCHE “AAA” debt.
Estimate: 60% recovery. On THE BEST CDO debt in existence. A 40% loss.
ANYTHING “A” or below: ZEEEERRROOO.
Thank goodness the subprime (and Alt-A and prime) crisis is “contained”. Yes, it’s strictly limited to losing 100% for investors, as long as they aren’t leveraged.
See Link at Post #6.
The writer nailed it.
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