Fed's Big Bail Out... Again!

Again and again the Fed has been trying to "provide liquidity" to the "credit markets" since August 2007. Again and again the institutions that function in these "markets" have failed to respond to these attempts. Interbank lending rates have risen, banks don't want to lend to each other and nobody wants to buy the esoteric garbage sold into these markets by Wall Street Banks over the past few years.

So what does the Fed do? They come in as the lender of last (and I mean LAST) resort. This time they are injecting $60 billion, $20+ billion to the European banks and $40 billion to the US banks. How is this different? Read the excerpt from this article:

"For the first time, it will accept bonds issued by sovereign nations rated Aa3/AA- or above; bonds by G10 government agencies guaranteed by national governments rated AAA; conventional AAA debt issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Corporation and the Federal Home Loan Banking system; and AAA-related U.K., U.S. or European asset-backed securities backed by credit cards and U.K. or European residential mortgage-backed securities."

Basically the Fed is doing what no other bank is willing to; Take collateral NO OTHER BANK OR INVESTOR WANTS!

Does this sound stupid to you? Well it should. This was what was written in the FT today:

"In an extremely bold departure from its previous policy, the Bank of England is increasing the size of its scheduled auction next Tuesday from £2.85bn to £11.35bn, with £10bn of these funds allocated for three months. It has also torn up its collateral rules and will accept mortgage backedsecurities, covered bonds and dollar denominated securities for the first time...
Unlike the auctions in September, when banks shunned its three-month money, the Bank is auctioning this cash without a minimum interest rate of one percentage point above its official rate of 5.5 per cent. Instead, the Bank is following the ECB’s method of expecting a penalty rate to come from the bids for the money rather than a centrally determined price. Even though senior officials have qualms about changing collateral requirements in a crisis, the Bank felt there was now sufficient general fear in banking circles which could not be offset by any one bank."

Why are they doing it? Check out this blurb from the FT on 4 December:

Last week, the US Federal Reserve announced long-term operations designed to maintain liquidity in the money markets during the year-end period.
"We are now in the sixth month of the credit crisis. Funding costs have gone up for everyone," Suki Mann, credit strategist at Société Générale, said. "Although the year-end is playing a big part in the lack of liquidity, there is a worry it could go on into the New Year and that means trouble." Bob Janjuah, chief credit strategist at RBS, said: "I have never seen things as bad in terms of trading credit. There are lots of people hoping it will get better in January - but we are not so sure."

Of course there is this blurb on 1 December 2007 from the FT:

"Emergency plans to avoid a year-end funding crisis were unveiled by the European Central Bank yesterday, highlighting economic uncertainties that will almost certainly keep its main interest rate unchanged next week - despite
soaring eurozone inflation.
The ECB will take the exceptional step of extending a regular money market operation by an extra week to cover the year end, when financial institutions will be under huge pressure to show strong liquidity on their books. The move, the latest in a series of increasingly aggressive pledges to ensure markets function normally, followed a fresh surge in one-month and three-month interest rates. The US Federal Reserve announced a similar move this week."

If it seems as if the ECB and Fed seem to be "one upping" themselves like every week, you are reading correctly. They are dealing with an unprecedented crunch and the markets are not working, PERIOD.

So why do I write today? This bank action is really screwing up the markets. All this "short term liquidity" by the Fed and ECB is not working. But, every time they take action, the stock markets get rocked. They either rise or fall in dramatic fashion with every word or hope this mess will get cleared up or every word that we are doomed.

No rational investor can make money in this environment. I am a rational investor and am completely fed up with the Hedge Fund manipulated movements of the stock markets almost daily. I feel like I am getting a kind of sea sickness and if others are like me they soon will be loosing their insides, completely unable to tell which way is up. This does not mean the ship sinks but it damn sure means allot more money is going to be lost. So you better get on dry land now cause the storm is getting worse.

Peace.