Global Feds, Libor Rate, Fear Continues

A: More global banks are flooding financial systems around the world with liquidity to help ease the drying up of the secondary mortgage and credit markets. Both Japanese & Australian central banks are the latest to step in and add liquidity to credit markets. Meanwhile, the ECB stepped up again and pumped another 61B Euros into their systems. More fed action equals more FEAR on wall street as traders assume the worst. The US Fed was expected to announce soon more liquidity to be added to our financial systems. On a side note, all those with adjustable rate mortgages should note the rise in the LIBOR rate, which is what those ARM's adjust to after the initial lock in rate expires. The LIBOR rates have been rising adding some more pain to those with resetting ARM's.

First, the news.

Major Central Banks Take Action... (Forbes) -

In moves that deepened the well of negative sentiment that impacted European markets in early trade, the Bank of Japan pumped 1 Trillion Yen into the local money markets Friday as overnight rates shot up amid fears of shrinking liquidity.

'We offered one trillion yen ... as we judged it would be better to offer (ample) funds,' a spokesman for the central bank said.

The sum compares with the 400 billion yen the bank injected Thursday and is the highest amount since it offered one trillion yen on June 29.

In Australia, the Reserve Bank injected more than twice the average daily amount of funds into the banking system.

The central bank's market data showed it injected 4.95 billion Australian dollars into the system Friday, well above the daily average for the year-to-date of around 1.86 billion dollars.

I would expect the US Federal Reserve to announce today a further move to add liquidity to our credit markets; which is an alternate move to pump liquidity into our financial systems without cutting the fed funds rate.

Its important to know that this credit crunch is NOT an interest rate issue, rather it is a liquidity issue in the credit markets and specifically the secondary mortgage markets where banks, lenders, and hedge funds are having major problems unloading securities that have lost tremendous value. A lot of these investments, especially in the hedge funds world, were made via a marked to model approach using specialized software algorithms that analyzed past trends and markets and makes probability predictions that are later invested on. Right now, hedge funds and other major brokerages are finding that this marked to model approach did NOT take into account the current credit/liquidity crisis and are now realizing that the securities marked to market are worth much much less. This is why many banks, lenders, brokerages, and hedge funds are trying NOT to mark their holdings to market value and book the losses. They are trying to ride out the wave.

Moving on. Lets define the LIBOR rate so I can explain whats happening here.

LIBOR Rate - LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in US capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate. It's an index that is used to set the cost of various variable-rate loans, including credit cards and adjustable-rate mortgages.

Recently, this LIBOR rate has been moving higher; a bad sign for all those with adjustable rate mortgages that are resetting to current LIBOR rates. If you are a resetting ARM holder, you may see your monthly payments jump even higher.

According to Bloomberg's article, "Overnight Dollar Libor Gains to Highest Since 2001" -

The London interbank offered rate climbed to 5.96 percent from 5.86 percent yesterday, when it gained more than half a percentage point, the most in at least six years.

Three-month dollar Libor rose to 5.58 percent from 5.5 percent, the BBA said. The three-month euro interbank offered rate rose to 4.45 percent today from 4.41 percent yesterday.

I am having trouble finding up to date charts for this Libor rate so for now, you will have to trust me and the Bloomberg article that this rate has risen signficantly over the past week or so. I'll try to find a chart to add to this post now.

UrbanDigs Says - More central banks acting means more perceived problems on wall street adding to the fear that is currently out there. The stock markets hate uncertainty and every time a fed adds liquidity, a bank goes under, a hedge fund announces a liquidation, or a brokerage shuts down a fund it ADDS to the uncertainty of the current credit crunch and how deep the whole thing goes. This is what we are in now. Other than to expect extreme volatility, I don't have much to say as I continue to analyze this situation and report back to you. I remain a strong believer that all news should come out as soon as possible, which would add to the pain, so that we can get through this mess via transparency and global feds can do what they need to assess and plan a strategy to aid the credit crunch. As long as corporations, hedge funds, lenders, and big banks continue to hide these problems and try to ride out the wave, we are going to see very volatile markets and doom & gloom headlines in all media.