Fed Acts! Targets Freezup in the Credit Markets
A: Wow, some big news today and what a timely piece yesterday, "What's A Fed To Do", discussing the ineffectiveness of fed rate cuts and the effectiveness of TAF & repos to heal what currently ails us. The fed pounced on what is working and announced today a new plan to lend up to $200 Billion in treasury securities to unfreeze the credit markets. The key element to the newly created TSLF, or Term Securities Lending Facility, is the 28-day hold period + the further widening of allowable collateral to be used. In addition, the fed has authorized increases in existing programs known as 'swap lines' with foreign central banks. All in all, a very targeted and effective move that is having an immediate effect.
The news from a variety of sources:
Yahoo Finance:
The Fed said it will make up to $200 billion in cash available to cash-strapped financial institutions.Bloomberg:
"Pressures in some of these markets have recently increased again," the Fed said in a statement. "We all continue to work together and will take appropriate steps to address those liquidity pressures." The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank.
In addition, the Fed has authorized increases in existing programs called "swap lines" with the European Central Bank and the Swiss National Bank.
The Federal Reserve plans to lend up to $200 billion of Treasury securities in exchange for debt including private mortgage-backed securities that have slumped in value as homeowners defaulted on their payments.Here are some reactions I am seeing in the markets:
The Fed set up a new tool, the Term Securities Lending Facility, to lend Treasuries to primary dealers for 28-day periods, through weekly auctions. The Fed also said in a statement in Washington that it's increasing the amount of dollars available to European central banks through swap lines.
a) treasury yields are rising big time
b) equity futures are surging (short-covering will fuel the rally)
c) financials are surging on this targeted fed move
d) fed funds futures lower chances of expected total rate cuts to come
I would also expect this to have a narrowing effect on credit spreads over coming days, and that would be a very welcome macro reversal. Also, to be allowed to use debt including mortgage backed securities as collateral in exchange for the loan, is huge. However, there is something very important to understand here: THIS MOVE WAS TARGETED AT THE CREDIT MARKETS AND MEANT TO EASE THE DISTRESS & ILLIQUIDITY OF THE SECONDARY MORTGAGE MARKETS! It is not a cure all move and it will NOT prevent weakening economic data from coming out over the next few quarters. It will help where help is needed most on wall street, the credit markets. If there was a secondary mortgage market where MBS can be traded again, the process of cleansing the balance sheets of financials could occur at a faster pace so that we can return to a more normal lending environment.
For all those that believe that we must have a functioning credit market and a liquid secondary mortgage market if we are to start the recovery phase, me included, this move was aimed at achieving this. Equity markets were oversold and this probably will result in a sharp bear market rally over the coming days; we will not enter a new bull market until the financials balance sheets are cleaned, and the cleansing process for this is still ongoing.
The bigger picture here is that the fed seems to have found a tool that works, outside of traditional rate cut actions that have negative effects on the US dollar & commodity prices.
PHOTO Source: Denovobanks.com
Posted by Justin
Tue Mar 11th, 2008 10:30 AM
A tool that works?
You mean helping banks avoid potentially balance sheet sinking 31st March hair-cuts on their "AAA rated" poo by handing over (our) public money for it no questions asked, so the same banks can turn around and use that cash to prop up their ailing hedge funds, frozen pier loans, SIVs, and other stalled vehicles that should never be on the financial road in the first place?
Sorry all I see is a stealth public bailout, a "payday loan" to a bad actor at 2% apy. One that preserves the status quo (in particular delaying consequences for the walleyed dolts who got us into this mess in the first place).
Posted by uwsider
Tue Mar 11th, 2008 10:41 AM
How different is this to FED printing money by lowering interest rates? Is there any real difference in terms of fanning inflation?
For example, in "printing" terms, is it the same as cutting 1/4 point?
Posted by Noah
Tue Mar 11th, 2008 10:58 AM
It is different. Its a targeted shot as opposed to a barrage of missle strikes. If the fed CUT rates today, would the US dollar rise by the most amount in six months against YEN.
The very concept that this targeted tool will likely limit the aggressive of future rate cuts SHOULD have a secondary effect on easing commodities priced in dollars. This is gold/oil negative in medium term in my mind, especially after the runup both have had in past years; not yet as we still have cuts coming and still dont know if this will have a longer term effect on credit markets.
I have no clue how you would convert this move into rate cuts, for effectiveness sake, but out of many options out there, it seems a low risk high reward move..
All this could be out the window if in the next few months credit markets are worse than they were yesterday. We know we have bad economic data coming over next few quarters from the 4-6 month freeze/contraction of markets and business investments, so thats yet to show its ugly face in damage done.
Posted by Colgin
Tue Mar 11th, 2008 11:05 AM
Noah,
If you want to truly understand what is going on with today's action you should ignor all MSM and look to Fed watcher extraordinaire Lee Adler of The Wall Street Examiner. Here is Lee on today's Fed move:
http://wallstreetexaminer.com/?p=2434
Posted by Beth
Tue Mar 11th, 2008 11:06 AM
This sounds similar to a securities lending program, but instead of portfolios pledging their securities banks are pledging their assets.
While this might add liquidity to the secondary markets, success depends on investor confidence in the credit markets, and that's something the Fed - no matter what anyone sez - can't contrive.
Posted by Noah
Tue Mar 11th, 2008 11:13 AM
colgine - thx for article, I just skimmed. I understand all that, and I have used the bandaid on gunshot wound analagy many times here but for different context. Also, we all know that bad economic data will come from distress in past 4-6 months and housing woes are still AWFUL!
BUT, this move says something. The fed is going to use these facilities to target action which will LIMIT how aggressive he could be with fed funds rates! That in itself is a very important thing to note. If we can get out of this mess with 3-5 more of these types of injections and limited on future cuts, 50bps MAX, at a time when foreign markets are likely to lag in their slowdowns forcing their CB's to ease, that is positive on the US dollar! Commodities priced in US dollars may, and I stress may, not get the rate cut umph that it was betting on!
Posted by Noah
Tue Mar 11th, 2008 11:19 AM
Colgin - wow, had to reread that article. Very interesting and no, I didnt know that. Is there more sources that go into detail about this topic?
Posted by mike
Wed Mar 12th, 2008 09:53 AM
this all depends on how the lending is allowed to work. How will the securities be valued? If it's any more than current market prices, this will amount to a transfer of the garbage securities from bank balance sheets to the government when the banks "default" on the loan in 30 days. The government will then be stuck with the crap and banks will no longer have write downs, and all the government spend was the equivilant of 6 months in Iraq. This is nothing more than literally handing banks $200 billion over the next 30 days to rid the market of the securities.
However, if the securities are still performing (many are at least paying their coupons), the government actually stands to make money on the trade in the long run. Stability in the short run, fed profit in the long run sounds too idealistic to actually work, so I'm very skeptical that this will do anything more than provide yet another dead cat bounce.