The bank funding market continues to be under stress. To some degree, this was anticipated, as various market participants saw signs that the year-end liquidity squeeze, and the months preceding it, would be worse than last year, which was bad enough to lead to the creation of the first special liquidity vehicle, the Term Auction Facility.
Note that if central banks, who have the greatest ability to influence short term rates and money market conditions, cannot do so via their routine liquidity measures and the new alphabet soup of Fed facilities, it it not clear that the Paulson bailout plan will have any more success. The immediate remedy would be to increase the size of the TAF.
From Bloomberg:
Money-market interest rates increased as banks sought to bolster balance sheets amid deepening concern a bailout of financial institutions won’t happen quickly enough to ease short-term funding constraints.
The one-month London interbank offered rate, or Libor, for dollars jumped 22 basis points to 3.43 percent, the highest level since January, the British Bankers’ Association said today. The corresponding rate in euros rose 7 basis points to 4.91 percent and the pound rate also advanced 7 basis points, to 5.91 percent.
“There’s no real term funding markets except for central banks,” said Meyrick Chapman, a fixed-income strategist in London at UBS AG. “The Libor is meaningless. It’s for unsecured lending and there is no unsecured lending as far as I can see.”…
`We’ve seen quite a bit of upward pressure in the past couple of weeks and the fact that the TAF came in at over 50 basis points above yesterday’s one-month Libor will no doubt add to that,” said Barry Moran, a Dublin-based money-market trader at Bank of Ireland, the country’s second-biggest bank.
The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 30 basis points to 165 basis points today, the highest level since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.
To help ease the gridlock in dollar funding, the Fed arranged $30 billion in swap lines today with central banks in Norway, Sweden, Denmark and Australia.
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Respectfully, you’re missing the point on LIBOR.
Investment banks such as Lehman became dependent on short term and overnight funding to support their balance sheets. In Lehman’s case, I believe 25% of their liabilities were funded overnight.
There have been half a dozen LIBOR spikes over the last year, each of which was a valid and true signal that borrowing short and lending long might lead to disaster in the realizable future.
Instead of acting on this signal by deleveraging, selling assets, or raising equity, central banks, including the fed, added or arranged for more liquidity.
This has been disastrous, because it perversely encouraged the affected banks NOT to take the prompt actions necessary to reduce their dependence on short term money.
It has to stop. Overnight funding of questionable assets is not a right.
Agree – UBS is out saying Libor bendchmarks against unsecured debt and this it has become all but irrelevant. TAF yesterday was worrying on bid to cover & stop out. The real Libor as we know is likley much higher.
The buffet interview on CNBC was really embarrasing. He was either overtly lying or simply being disengenious, his expalantion of how he thought the gov't should buy the assets at market prices and that the gov't would make tons of money. Bugffet knows full well this isn;t the intent and yet he perpetutates the myth that somewhow this is good. Very sad to see someonw of his stature putting his own interests ahead of everyone else, but not surprising. Mush as his age would argue differently, I suppose he embodies the mentality of the current generation. The fleecing continues
Matthew Dubuque
Yves-
For me this story is entirely consistent with your post earlier in the day about huge corporate cash reserves.
Everyone is hoarding cash. Nobody trusts anyone else. This applies to corporations and banks both.
Matthew Dubuque
mdubuque@yahoo.com
Overnight funding is not the problem. It might be new.
LIBOR has the money if you pay the rate. It will flow as soon as its sewe we are strong.
Buffett has his own personal agenda never forget it.
———————————–
From Richard Cohen WPost
Now the government is proposing another pig in a poke. The huge federal bailout is necessary, but Democrats are right to insist on detail and oversight. For too long, the financial markets have operated without much of either. Now the Bush administration is asking Congress for a blank check, what New Jersey Gov. Jon Corzine calls the “moral equivalent” of the congressional resolution that wound up authorizing the Iraq war. Corzine, a former Goldman Sachs chairman (not to mention U.S. senator), is a voice worth heeding nowadays. When I talked to him, he had just gotten hold of the two-page administration program. Two pages! This is another exotic financial instrument.
The wise words of William Goldman, the screenwriter, should echo in Congress’s ears. He not only coined the phrase “follow the money” for “All the President’s Men,” but he expressed the sum total of knowledge about the making of movies with: “Nobody knows anything.” The same has been true about opaque financial instruments. It’s up to Congress to fix that.
The lesson of Leeson has yet to be learned. Financial markets have moved well beyond the trading of things that could be seen or measured or weighed. On Wall Street, older men employed the lingo of younger men to pretend they knew what was happening — but they didn’t. Now, Congress is being asked to do something similar. That won’t do. Bear down. Ask questions. Don’t be afraid to regulate. Act as if you’re the government, for crying out loud. Because if you don’t do this right, you soon won’t be.
Your Urgent Help Needed
Dear American:
I need to ask you to support an urgent secret business relationship with a
transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had
crisis that has caused the need for large transfer of funds of 800 billion
dollars US. If you would assist me in this transfer, it would be most
profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my
replacement as Ministry of the Treasury in January. As a Senator, you may
know him as the leader of the American banking deregulation movement in the
1990s. This transaction is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds
as quickly as possible. We cannot directly transfer these funds in the names
of our close friends because we are constantly under surveillance. My family
lawyer advised me that I should look for a reliable and trustworthy person
who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account
numbers and those of your children and grandchildren to
wallstreetbailout@treasury.gov so that we may transfer your commission for
this transaction. After I receive that information, I will respond with
detailed information about safeguards that will be used to protect the
funds.
Yours Faithfully Minister of Treasury Paulson
Story: The reason why my great grandma left then feudal Germany is because she was a peasant on a rich landowners farm. To help fund her journey to the United States – she and her mother raised chickens, fattening them up as much as she could, then selling them for a tidy profit. In those days, chickens were tantamount to cash and the women were allowed to stash the money they made from the sale of those fat chickens.
Quick! The land owner is coming! Hide those chickens!
No Bank Guarantee here:
Responding to questions from lawmakers, Bernanke said that should the rescue succeed and spur an economic recovery, that may lead the Fed to raise interest rates sooner than it otherwise would. For the plan itself, “I don’t expect any effect on inflation,” Bernanke said.
-S
commenter #1 here.
A close reading of Buffett’s comments will not lend credibility for the bailout bill.
Buffett’s argument:
The collective bailout will enable my private profits in GS.
I am not moved.
Virtual Equity was invented by the real estate market. Good housing in desired locations retain equity.
What is the real value of a $650,000.00 apartment on the Upper East Side where an alcove is passed off as a kitchen and a windowless box at the end of an ersatz hall is called a bathroom?
Creating an artificial credit shortage is very easy, people.
This bailout is being sold just as NSC-68 was sold: with the use of language that is “clearer than truth.”
I suggest you read this document by Steven Casey: http://www.lse.ac.uk/collections/CWSC/pdf/selling_nsc_68.pdf
Matthew Dubuque
In terms of the virtual unanimity of people willing to lend funds or extend credit from any sector to any sector, I am supremely baffled by those who claim we are at great risk of inflation. Rather this is emblematic of an extremely serious risk of a deflationary burst.
Matthew Dubuque
mdubuque@yahoo.com