September 19, 2008

Daniel Berehulak/Getty Images

Workers walked toward the financial district on Thursday in London.

Central Banks Pump Cash Into Market

By MATTHEW SALTMARSH and KEITH BRADSHER

Reflecting concerns about the health of the global financial system, the Federal Reserve and the world’s other major central banks significantly escalated their assistance to global markets on Thursday, making almost $200 billion available after bank lending froze to a near halt and threatened the global economy.

In a statement released at 3 a.m. in Washington, just as the markets opened in Europe, the Fed said that it had authorized a $180 billion expansion of its temporary reciprocal currency arrangements, known as swap lines, to allow banks to borrow more dollars in money markets at a lower rates.

Paul Mortimer-Lee, head of market economics in the London office at BNP Paribas, said the move reflected concerns that the financial markets now appear to be facing their gravest problems since the Depression.

“We’re high on a mountain, with a thin rope and holding on by our fingertips,” he said. “Are policymakers scared? They should be.”

The concerted central bank action follows the rout on financial markets this week as the bank Lehman Brothers filed for bankruptcy protection, the brokerage firm Merrill Lynch lost its independence and Washington announced an $85 billion bailout of the insurance giant, the American International Group.

The move seemed to cheer equity investors, who reversed part of the earlier deep slide in Asian markets and bid stocks up in Europe. American stock indexes opened with strong gains, with the Dow Jones industrials rising more than 100 points in early trading.

The central problem is that, lacking confidence in each other’s ability to repay, banks have slowed their lending to each other via the money markets. The short-term rates at which they borrow have surged as they seek to keep cash on their books.

Besides the Fed, the coordinated action involved the European Central Bank, the Bank of Japan and central banks in Canada, Switzerland and Britain.

Analysts are starting to talk about the need for much more intervention from Washington, warning that Thursday’s move would not provide a quick fix to unlock bank lending.

Writing in The Financial Times on Thursday, Kenneth S. Rogoff, the former chief economist at the International Monetary Fund, said the United States would have to spend 5 to 10 times more than it has already on bailouts, an amount closer to $1 trillion to $2 trillion.

The monetary fund had estimated in April that the losses related to the crisis, which started in mortgage markets in the United States, would cost $1 trillion.

Such a rescue would dwarf the massive bailout of the American financial system in the 1980s by the Resolution Trust Corporation, a government-owned asset-management company charged with liquidating assets of thrifts and the Japanese government’s mass purchase of bad debts from banks during the 1990s.

“We are moving from a monetary solution to a fiscal solution,” said Richard McGuire a fixed income strategist at RBC Capital Markets in London. He said that while the central banks’ moves had helped, other solutions would be needed.

The way that traders usually measure the health of the money markets to judge whether banks are willing to lend to each other — and ultimately lend to consumers — is by looking at spreads in the money markets. These are the differences between interest rate charges overnight, and those charged over a longer period.

After the fund injections by the banks, the cost of borrowing dollars overnight fell, with the benchmark Libor rate falling 1.19 percentage points to 3.84 percent, Bloomberg News reported, citing the British Bankers’ Association.

But the gap between three-month United States Treasury yields and the three-month London inter-bank, or Libor, rate — known in the market as the TED Spread — narrowed only slightly to around 299 basis points around midday in London, from just over 300 basis points Thursday. A similar slight narrowing of spreads was seen in sterling and euro markets.

“The dust may settle and the market may take a more sanguine view in time,” Mr. McGuire said, “but for now, it looks like a palliative rather than a panacea.”

In its statement Thursday, the Fed said that as part of the infusion, it had also authorized increases in the existing swap lines with the European Central Bank, up to $110 billion from $55 billion, and the Swiss National Bank, up to $27 billion from $15 billion. Similar arrangements were announced with the Bank of England and the Bank of Canada.

“The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures,” the European Central Bank said in a statement.

Smaller central banks were also active on Thursday in providing extra money to their country’s financial systems so as to make sure that banks and other financial institutions could find money to borrow without having to pay exorbitant interest rates.

The Hong Kong Monetary Authority, for example, injected 1.556 billion Hong Kong dollars, worth $200 million, into the territory’s banking system on Thursday afternoon, John Tsang, the financial secretary of Hong Kong, said.

The monetary authority acted after the interest rate that Hong Kong banks pay to borrow money overnight from each other suddenly tripled shortly after lunchtime, to 4 percent and threatened to rise further.

The maneuver appeared to be successful, with overnight interest rates falling through the rest of the afternoon. Central banks in Japan, Australia and India pumped tens of billions more into money markets, while China’s central bank said it had lowered the rate at which it conducts bond repurchase agreements.

Analysts said the central banks were doing what they could.

“This is clearly a very significant help and central banks are showing decisive leadership here as risk aversion is hitting the private sector,” said Julian Callow, chief European economist at Barclays Capital in London

Still, noting that the Fed left its benchmark short-term rate on hold this week, analysts said that the cash infusions did not necessarily mean that central banks would lower their benchmark short term interest rates.

“If anything,” Callow said. “this sends the signal that they are trying to achieve stability via money markets rather than by cutting short-term rates.”

Heather Timmons contributed reporting from New Delhi.

Central bank moves cheer markets

Markets have been on a white-knuckle ride this week

Markets regained some poise in Thursday trading, cheered by news that six of the world's top central banks have taken steps to calm credit markets.

The banks will release $180bn (£99bn) to lift the amount of credit available.

US stocks opened higher, echoing gains in Europe. Lloyds TSB's takeover of UK lender HBOS also dispelled some of the gloom hanging over the financial world.

But markets are expected to stay volatile on fears that more firms could succumb to the financial crisis.

The main Dow Jones index was up 1.34%, or 142.2 points, at 10,751.8, in early exchanges in New York.

President George W. Bush said he was closely monitoring the situation on financial markets and the recent actions taken by the Federal Reserve and other regulators were "necessary and important".

"We will continue to act to strengthen and stabilise our financial markets and improve investor confidence," he said.

The past few days have seen a number of dramatic developments on financial markets. Thursday's key events include:

Central banks from UK, US, Europe, Canada, Switzerland and Japan will release the $180bn into their money markets. The move is the fourth such concerted effort since the onset of the credit crisis last year.
The news helped to reduce the interest rate at which banks lend to each other - a key factor behind the problems in credit markets.
Cautious investors are looking for safer places to put their money. The price of gold, regarded as a haven in troubled times, rose to $871.2 an ounce after recording its biggest one-day gain in history on Wednesday.
Lloyds TSB released details of its £12.2bn takeover of HBOS. The deals values HBOS shares at 232p each, is expected to lead to cost savings of £1bn a year and could also result in significant job losses.
Russia's main stock exchange suspended trading for a second consecutive day as the government tried halt a sharp fall in share prices and restore confidence in the economy.

Banks take action

The action taken by the central banks helped to boost confidence on European stock markets although analysts doubted it would have a long-term impact.

The credit crunch is creating a new world order in banking and finance

Robert Peston, BBC business editor

Read Robert's blog

Central banks release more funds

"Markets know that central banks don't own a magic bullet, otherwise they would have used it already," Sean Callow, currency strategist at investment firm Westpac.

"And we've seen these sorts of steps before; it only addresses one of the symptoms of the underlying crisis."

In early afternoon trading, the FTSE 100 index was up 36 points, or 0.74%, at 4,948.7. Germany's Dax index was up 0.8% and France's Cac 40 was up 1.23%.

In Asia, Hong Kong ended flat at 17,632.5 after earlier falling by 7% as fears of more company failures gripped investors.

Tokyo's Nikkei share index ended 2% lower. Share indexes in Shanghai, Taiwan and India fell by between 3 and 5%.

On Wednesday, the Dow Jones index of leading US stocks fell by more than 4%.

Market turmoil

Markets have been on a white-knuckle ride this week, with the collapse of 150-year old investment bank Lehman Brothers quickly followed by a government rescue of US insurance giant AIG.

Another investment bank, Merrill Lynch, has been taken over by Bank of America.

There has also been feverish speculation about the future of two other leading US banks - Morgan Stanley and Washington Mutual.

The BBC's business editor Robert Peston said that even Goldman Sachs, the pre-eminent investment bank cannot be confident it can thrive and survive as an independent.

"The credit crunch is creating a new world order in banking and finance," he said.

For a Bailout, Press 'One' . . .

By Alan Neff
Thursday, September 18, 2008; A21

"Hello! You've reached the United States Treasury's automated bailout hotline. Please listen carefully, because our options have recently changed. If you're too big to fail, press or say 'one.' If not, hang up and dial 1-800-FOR-FEMA.' "

"One."

"Great! You've selected Option One. If you're a bank, press or say 'one.' If you're a brokerage firm, press or say 'two.' If you're an insurance company, press or say 'three.' "

"Three."

"You've selected Option Three, which means you're an insurance firm. Did I get that right?"

"Yes."

"Okay, let's drill down a little further. If you're calling because you're besieged by class-action lawsuits brought by take-no-prisoners plaintiffs' attorneys because your large corporate policyholders committed innumerable mass toxic torts, press or say 'one.' If you're calling because you insured billions of dollars' worth of undocumented, nonperforming mortgages, press or say 'two.' "

"Two. No, wait, one. I mean, uh, both."

"I'm sorry. I didn't understand. Let's try something else. If you're the CEO of an insurance company with a servile compensation committee that gave you an irrevocable golden parachute, press or say 'one.' If you've served on corporate boards with Henry Paulson, press or say 'two.' If you believe in strict market Darwinism for every company but yours, press or say 'three.' "

"Three."

"If you want your check automatically deposited into your company's bank account, press or say 'one.' If you want cash in small, unmarked, used, nonsequential bills delivered to a branch office in Zurich or the Cayman Islands, press or say 'two.' "

[Silence. Thinking. Surge of fiduciary energy.]

"One."

"Okay. Please enter the amount you want using the number keys. Use the star sign for a decimal point and press pound when you've finished."

[Lengthy series of numbers entered, followed by the pound sign.]

"Wow! You are in trouble! Your funds should clear in three business days. When you have another claim, call back. Thank you for calling, and have a great day!"

Alan Neff is a lawyer and novelist. He lives in Chicago.