Re: Fed to lend to CBs in unlimited quantities


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(email exchange)

>   
>   On Mon, Oct 13, 2008 at 3:00 PM, Craig wrote:
>   
>   Since nobody understand the local currency / foreign currency distinction and
>   since these obligations are part of the normal financial commerce of these
>   countries, is it possible that these loans will allow the markets to normalize,
>   

Yes.

>   
>   Allow the various governmental bodies to remove the guarantees/lending and
>   never realize this risk existed?
>   

Probably not.

>   
>   Everybody was perfectly happy with these private sector risks before the
>   credit markets seized up. Other than the sudden realization of everything
>   you’ve pointed out, what factors will put this over the edge?
>   
>   All this boils down to this question: Does this necessarily have to end badly?
>   

Looks that way to me.

>   
>   Or can the participants use this as a life rope to deleverage successfully,
>   ending the need for the life rope?
>   

I think the incentives are now in place for massive fraud.

Eurozone banks will find it hard to resist the demand for USD loans to their ‘friends’ in finance and industry, that will be based on inflated appraisals, inflated income statements, etc.

Just like the subprime issue was here.

It’s open season and my guess is the Fed is about to be in shock at the size of the first auction.


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2008-10-13 CREDIT


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Breaking out to new wides, as equities test new lows.

As before, equities are unlikely to rally substantially without the rest of the credit products tightening up.

It’s all the same thing.

IG On-the-run Spreads (Oct 13)

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IG6 Spreads (Oct 13)

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IG7 Spreads (Oct 13)

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IG8 Spreads (Oct 13)

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IG9 Spreads (Oct 13)


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Fed to lend to CBs in unlimited quantities unsecured (Update2)


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Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.

This defies comprehension.

It’s potentially functionally a fiscal transfer.

Interesting they have the authority to do that.

They wouldn’t even do it for the US banks where the Fed demands collateral for loans.

It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.

Somehow this got under Congress’ radar screen.

Watch for the size of the first USD auction.

The ECB and other CBs are going to set a rate and fill all requests at that rate.

Could be over $1 trillion?

Should bring USD LIBOR down to near the Fed Funds rate.

Helps the euro vs the USD at first.

However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.

USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.

Still trying to comprehend all the ramifications, but they are very large.

This also means no government should default in the eurozone due to bank funding issues.

As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.

It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.

They could snowball into the trillions, and be very difficult to shut down.

Which would also mean accelerating inflation.

Fed Releases Flood of Dollars, Market Rates Fall (Update2)

by John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.


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Fed to lend in unlimited quantites to foreign CBs??? (Update1)


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This is hard to believe. Those CBs don’t have unlimited USD.

So, if true, they will be borrowing them from the Fed via an extension of Fed swap lines.

The FOMC has approved lines of $620 billion as last reported.

This is functionally unsecured lending to these CBs.

Repayment can only come from selling their own currencies for the needed USDs.

(or by somehow net exporting to the US or selling assets to the US which are hard to imagine.)

Somehow, this high risk, unsecured, ‘back door’ lending has remained under all radar screens.

And, if true, we will soon see the total USD funding need in the Eurozone.

Fed Says ECB, Others to Offer Unlimited Dollar Funds

by John Fraher and Simone Meier

Oct. 13 (Bloomberg) The U.S. Federal Reserve led an unprecedented push by central banks to flood financial markets with dollars, backing up government efforts to restore confidence in the banking system.

The ECB, the Bank of England and the Swiss central bank will offer unlimited dollar funds in auctions with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. The Bank of Japan may introduce “similar measures.”


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