Fed to the Rescue

The Federal Reserve propped U.S. and global markets Tuesday morning by announcing it will lend up to $200 billion of Treasurys to primary brokers for 28 days, rather than overnight. Other central banks, including the BoE, Bank of Canada, ECB and Swiss National Bank simultaneously announced moves to boost global liquidity. The 'Term Securities Lending Facility' will begin auctioning Treasurys on March 27.

"Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures."

Initial reactions were largely positive [Reuters]:

"To state the obvious, in the near term the Fed and global central banks have provided the thing everyone needed and that's cash," economist Martin Blum said. "It's undoubtedly positive in the near term."

"In the bigger picture, is unclear whether this will prove sufficient, but it does demonstrate the Fed's resolve," Marc Chandler of Brown Brothers Harriman said.

Others were less generous with their praise:

"This Fed action is good for a day or two. There are three problems in the market. One is the price of money, then liquidity and counterparty risk," portfolio manager Michael Cheah said. "The Fed can do all it can in the first two areas by trying to reduce fed funds and the price of money. However, these moves are not going to mitigate the counterparty risk. Today's injection is not going to make prime brokers any less willing to call margins, or lend money. People are afraid of the counterparty risk. This is another government intervention that will create more harm than good."

U.S. futures jumped on the news. As of 9:15 AM: Dow +1.88%. S&P +2.2%. Nasdaq +1.71%.

Comments

[siegfried:]

Many banks and brokers were in danger of having massive write downs on their Q1 financial statements. The Fed's 28 day purchase of agency and non agency MBS will allow these banks to sell these securities at par and permit them to avoid this Q1 earnings devastation. If the banks use this window of opportunity to write down other deteriorated assets in their loan portfolio this may offer a "soft landing", otherwise today's Fed action just delays the day of reckoning.

2008 Mar 11 11:10 PM

[siegfried:]

Many banks and brokers were in danger of having massive write downs on their Q1 financial statements. The Fed's 28 day purchase of agency and non agency MBS will allow these banks to sell these securities at par and permit them to avoid this Q1 earnings devastation. If the banks use this window of opportunity to write down other deteriorated assets in their loan portfolio this may offer a "soft landing", otherwise today's Fed action just delays the day of reckoning.

2008 Mar 11 11:10 PM

[daffy:]

I have been talking soft landing for awhile now. I like that term. Why does everything have to a be fatality ridden nightmare with this game?

I really don't care if the market crashes wholeheartedly and then recovers brilliantly, or touches down gently and then takes off again in the same manner. Either way, there will be a bottom.

It sure would be nice to see some scenery along the way, but crashing into the cliff is not my idea of exhilirating fun.

I am more curious to see what the fed is going to do on the 18th. I imagin ethis willhave an impact on the decision. It seems that 3/4 pt. has to factored out of the equation now, but you never know.

Again, it will be an interesting week.

2008 Mar 12 08:00 AM

[nukldrager:]

A lot of "garbelling in the wabe" out there. Does anyone see consumer income becoming greater than or equal to it's outgo any time soon?

2008 Mar 12 08:32 AM