Coordinated Central Bank Action Fails to Relieve Money Markets

The coordinated central ban effort today to restore some level of activity to stressed funding markets, in which five central banks cut their policy rates by a half a point and China cut rates by 0.27%, is a resounding failure. From Bloomberg:

Overnight corporate borrowing costs jumped, Treasury bill yields fell and the bond market remained all but closed after central banks worldwide cut interest rates, showing unprecedented government intervention was failing to aid companies struggling to finance themselves.

Overnight rates on dealer-placed commercial paper rose 56 basis points to 3.5 percent, while one-day yields on the debt backed by car loans and credit cards increased 43 basis points to 5 percent, according to data compiled by Bloomberg. Investors sought safety in three-month bills, whose rates fell as much as 26 basis points to 0.5 percent. Two issuers sold $750 million of U.S. company bonds this week, compared with the weekly average this year of $16.8 billion….

The Fed, ECB, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part. Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point.

“The reality is there’s no private sector balance sheet willing to step in so the Fed and the Treasury are becoming the only balance sheet,” said Mark Kiesel, executive vice president at Pacific Investment Management Co., the manager of the world’s biggest bond fund. “In a market that lacks trust and confidence the private sector is on the sidelines.”

Further confirmation comes from John Jansen at Across the Curve, who also tells us that the pending participation of the Federal Reserve in the commercial paper market is having the unintended consequence of keeping activity on hold:

The central bank lowered the target funds rate to 1 ½ percent. The market is still dislocated as funds are trading around 4 ½ percent. (Several high ranking officials at the Federal Reserve have been observed applying for licenses as helicopter pilots.)

The money markets are still frozen and locked down. The only trading remains in the overnight sector. My source in this sector reports that AA banks would issue at levels 50basis points to 100 basis points cheap to libor but at the moment there are no bids against those offers.

Today the Federal Reserve is meeting with money market dealers to discuss the details of the CPFF. There are many still to be answered questions regarding charges and size. Until there is clarification of those ambiguities, the market will remain in its state of suspended animation.

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  1. doc holiday

    1. OURIC: Have you ever been involved with any negotiations for example, with the Russians?

    PALIN: We have trade missions back and forth. We do — it’s very important when you consider even national security issues with Russia — as Putin rears his head and comes into the airspace of the United States of America, where do they go?

    2. The Invisible One Quadrillion Dollar Equation

    Asymmetric Leverage and Systemic Risk…ress/ 280908.php

    According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

  2. doc holiday

    The FT reports that the $62 trillion credit derivatives (CDS) market faces its biggest test in October as billions of dollars worth of contracts on now-defaulted derivatives on Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual are settled.

    Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region.” …settlement_work

  3. doc holiday

    I feel so naked and alone here?

    Feb 11, 2008:

    “Given the strong growth of the hedge fund industry and the instruments they trade, we need to be vigilant,” the ministers said. “We therefore agreed to further pursue the issue.”

    Hedge funds, which manage vast pools of capital and operate largely outside regulatory scrutiny, have grown to become some of the largest and most important players in markets around the world, particularly on Wall Street and in London. Fortress Investment Group, the first hedge fund in the United States to go public, saw its shares rise 67.6 percent Friday, their first day of trading.

    At the meeting Saturday, even the U.S. Treasury secretary, Henry Paulson Jr. — whose former firm, Goldman Sachs, profits immensely from its relationship with hedge funds — said hedge funds needed more attention from policy makers.

  4. Anonymous

    This is the biggest heist of public funds by worldwide banking interests, ever. Banks know that the government will step in, so they have stepped out. Money is always available from private interests, at a reasonable price. This whole Wall Street charade is sickening, and dangerous.

  5. River

    Hank Paulson is currently on tv, discussing what actions are being taken/will be taken to abort the crack-up-boom. Hank stammers a lot and it is difficult for me to follow what he is saying…I think he said: We will not have exactly the same policies as the G7 nations, but will have different policies depending on each situation. He also said that he wants a meeting with the G20 to coordinate policy going forward.

    When asked specifically about coordinating with Russia he said that he needed to see details of the Russian plan…In fact, Hank said that he needed a lot of specific details from various countries…that made me wonder how he prepared for his presentation.

    Hank asked for ‘patience’ from the American People…make that… ‘pa-pa-pa-pa-patience’. Does Hank sense that the natives are becoming restless? I find it hard to read Hank…can’t tell if he is in panic mode or is that his normal way of speaking to the press/public?

  6. Chris

    The link on asymmetric leverage has expired.

    This goes to the BIS semi-annual report on OTC derivatives published in May 2008

    Table 3 on page 13 of the pdf is the data on interest rate stuff, by maturity and currency. This is probably the hair ball in the money markets. Credit default swaps follow in Table 4 on page 14.

    The interest rate derivatives were a $400 trillion or so problem by the end of last year. Credit default swaps nearly $60 trillion.

    There is probably a better vocabulary which could be developed for these things than the insurance language which was used in stock trading prior to the 1987 crash.

    At the races there’s bets and side bets. No one proposes to euthanize the horses to save the side bets. When the races are over, everyone goes home. No one keeps taking side bets round the globe around the clock.

    Bernanke is working on setting up a regulated CDS market in Chicago apparently.

  7. Richard Kline

    To me, the one good thing about the cut is the ‘coordinated’ adjectival. This is the first genuinely synched action since the start of the financial crisis, and that is most welcome: No more unilateral idiocy. More than the level or the pervasiveness of the cut, what I find relevant is that different respective sovereign currencies were maintained in their market defined slots. That, too, is a recognition of reality, and at least the mere matchbook sketch of a post-Plaza Accord realignment.

    By themselves, the policy rates matter naught since market rates bear no relation to them whatsoever at present. Whether the ECB, the Fed, or neither look better in the trajectories into this outcome will be debated in textbooks and political party platforms long after we wee commentors are done chewing it and spit the lot out. On the face, I’m happier that the ECB held until the pinch, and got pegged rates in a unified crisis response out of it. That’s my read, but then that’s my bias, too. [Though not my position: I have none, too poor.]

    We won’t know who can defend what currency slot until we get a good view of what kinds of deficits the major economies are going to be running (they’ll all be running deficits). The fact that every major economy is going to be running grossly stimulative policy rates is NOT a cause for celebration: That cure may equal the disease, kind of like radiation oncology for cancer. Where do we get the bone marrow transplant of good capital from in _that_ case? Well, that is tomorrow’s care . . . .

  8. Richard Kline

    China’s participation in the joint cut is also most interesting: They cut by half what the others did, and made no announcement. This, too, is a reality-based move. It is clear to all participants that the yuan needs to be higher globally than the slot the Chinese have been holding recently. To concede this publicly would be a political defeat for the CCP and their money managers, but it is nonetheless a substantive concession necessary to get the global financial economy scraped into a heap again—and they made that concession, tacitly.

    I repeat, this cut in its _form_ more than it’s content is the first rational act by public policy makers _collectively_ since the start of the crisis, and it sketches into view a perspective on the direction of a post-Plaza alignment of economies.

    And BTW the Fed should forget any fancy monetary jiggery-pokery. We need crystal clear actions, in _close_ coordination with other major economies, and a potent commitment to sovereign and banking solvency. This rate slotting suggests that more than not. More of the same, boys and girls. Show me the money, and how hard it is.

  9. Juan


    ‘how hard it is’ may have something to do with real economy conditions in respective regions which, particularly at the limits of fiscal and monetary policies, may not be all so responsive to coordinated action(s) but instead become more disproportional.

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