Fed Cuts Discount Rate

[Finster]

Re: Fed Cuts Discount Rate

We have also been in constant communication with our sources.

As tempting as it is to obsessively watch the activity on the surface and to see the surface data as relevant, it's important to keep the key dynamic in mind that I mentioned in Financial Crashes are a Process, Not an Event.

One of the realizations that has not yet occurred is that Central Banks, while having a powerful psychological influence over markets have a far reduced real and direct influence over liquidity than during any previous credit crisis.

The credit markets and commercial banks are better able to handle the current instance because credit derivatives, in theory, flatten the markets and make them less prone to cascading defaults. Our theory of Risk Pollution, however, suggests that while credit dependencies are reduced, concentration of risk in the hands of weaker credit market participants is actually greater than before.

The most serious problem was pointed out by H. (Woody) Brock at Strategic Economic Decisions, Inc., that the level of risk in the credit markets can no longer be measured to close to the degree of confidence that was possible when credit was mostly created by banks versus the credit markets, and that which cannot be measured cannot be managed. Thus decisions in the credit markets are now being made blind, based almost entirely on gut, habit and instinct. While the rumor fly and mood swings from greed to fear and back again, overall the trend is toward greater risk aversion and thus all asset classes continue to sell as the de-leveraging continues. (De-leveraging means lower returns.)

The 1987 type event I warned July 25 is coming does not happen until the market participants lose confidence in the ability of central banks to control events. Typically this happens some time after several of the kinds of Fed interventions that we saw today in a 50 basis point discount rate cut. If a major revelation follows soon after, then market participants start to wonder if there is a bottom at all. That's when the shit really hits the fan. Now there's still hope, and as long as their is hope there will be high volatility but no 1,000+ crash days. But those days are coming.

EJ, maybe you could expand on this still further? Particularly the idea that the central banks will not be able to "control events". Some of these factors, like those relating to all the players in the credit markets, are just a big black box to me with lots of inputs and outputs but little clear internal structure.

And would we be wrong in saying that the central banks actually can get the markets moving upward again, but at such great cost that they'd be unlikely to do so before that 1987-type event occured? I believe Ben Bernanke when he says "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services ... [and] ... always generate higher spending and hence positive inflation."

While Bernanke doesn't mention financial markets, he can sure "reduce the value of the dollar" in terms of stocks - and thereby support nominal stock prices even as real values tank. The problem is what happens if he does? So the Fed cuts rates to the bone. Hedge funds borrow and buy stocks. Since there is little demand left in the real economy for credit, the Treasury borrows and "cuts checks", say as "tax rebates" or mortgage bailouts. But this panics foreign creditors, they start dumping UST, and you get a huge spike in long interest rates, not exactly a balm for aching mortgage markets. Or they dump USD, import prices skyrocket, and all credibility on the inflation front disintegrates. Or competive devaluation resumes and global inflation skyrockets again. Or some combination of the three. Either way, real US consumption wherewithal goes down fast. So while they theoretically can "control" the markets, the choices they have are sharply limited, and the question boils down to what mix of painful outcomes they opt for. How does what you see differ, if it does? And can you make out any features on the other side of this financial singularity?

[bill]

Re: Fed Cuts Discount Rate

Liquidity will recede."

Little did I know how literally "tomorrow" it would turn out to be!

You got that right.
http://quote.bloomberg.com/apps/news...9P8&refer=news

Commercial Paper Market Roiled With $550 Billion Due (Update1)

By Mark Pittman
Aug. 21 (Bloomberg) -- Ottimo Funding LLC, whose name is Italian for ``excellent,'' has the highest possible credit rating and doesn't own subprime mortgage bonds. That made no difference to investors who refused to buy Ottimo's $3 billion of short-term debt this month as losses on home loans to risky borrowers infect the global credit markets.
``It's pretty much a straight contagion,'' said George Marshman, chief investment officer of Stamford, Connecticut-based Aladdin Capital Management, which oversees about $20 billion, including Ottimo. ``We think the assets are good enough'' to attract investors, he said.
The $1.1 trillion market for commercial paper used to buy assets from mortgages to car loans has seized up just as more than half of that amount comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe's largest bank.
Those sales would drive down prices in a market where investors have already lost $44 billion, based on Merrill Lynch & Co.'s broadest index of floating-rate securities backed by home- equity loans. That may hurt the 38.4 million individual and institutional investors in money market funds, the biggest owners of commercial paper.
`Uglier and Uglier'
``We're dumping all this collateral into the market and it becomes a death spiral for the assets,'' said Brian McManus, head of collateralized debt obligation research at Charlotte, North Carolina-based Wachovia Corp., the fourth-biggest U.S. bank by assets. CDOs contain pools of mortgage securities that have been repackaged and sliced into pieces.
Instead of commercial paper -- corporate debt that comes due in nine months or less -- money fund managers are running for the safety of government securities. Yields on three-month Treasury bills plummeted to 2.9 percent from 4.95 percent at the start of the month, even though central banks injected more than $200 billion into the financial system and the Federal Reserve cut the rate it charges banks for loans on Aug. 17.
The credit crunch, sparked by the highest level of defaults on subprime mortgages in a decade, is ``getting uglier and uglier,'' said Christopher Low, chief economist in New York for FTN Financial, the capital markets unit of Memphis, Tennessee- based First Horizon National Corp. ``This has moved beyond temporary. It's gotten beyond bailing out some hedge fund and into the broad economy.''
Refusing to Buy
Asset-backed commercial paper constitutes about half the total commercial paper market and has risen from $650 billion in 2003, according New York-based Lehman Brothers Holdings Inc.
Investors are refusing to buy short-term debt backed by any mortgage that isn't guaranteed by government-chartered companies such as Fannie Mae and Freddie Mac, Aladdin's Marshman said.
More than 20 companies including San Francisco-based Luminent Mortgage Capital Inc. and Thornburg Mortgage Co. in Santa Fe, New Mexico have been unable to roll over asset-backed commercial paper. Thornburg said yesterday that it sold $20.5 billion of securities at about 95 cents on the dollar to pay down commercial paper it couldn't refinance.
The amount of asset-backed commercial paper outstanding fell $50 billion in the week ended Aug. 15, or 4.3 percent, according to data compiled by the Fed.
No Help
Ottimo's bonds are backed by mortgages to people with credit scores of 708 and higher, compared with scores for subprime loans that average less than 620. The company's commercial paper has an A1+ rating from Standard & Poor's and P1 from Moody's Investors Service, the highest available.
Aladdin wasn't forced to immediately shutter Ottimo because the company exercised an option to extend the maturities on its commercial paper, providing 30 to 45 more days to find buyers.
No issuer had extended maturities in the 12-year history of the asset-backed market until Ottimo, Luminent and a unit of Melville, New York-based American Home Mortgage Investment Corp. did so within the past two weeks, according to S&P and Moody's. More than $100 billion of extendible commercial paper is outstanding.
``The unwind will not be denied,'' said Marshman. ``Whether it takes place overnight or over the course of several months, these assets have to be placed in different hands.''
A spokesman for Luminent, Robert Siegfried of New York-based Kekst & Co., declined to comment. Calls to American Home weren't returned.
Until this month, investors were willing to buy extendible commercial paper because it offered higher interest rates than standard asset-backed commercial paper.
`Financial Panic'
The short-term securities yielded 5.75 percent to 5.95 percent on average on Aug. 8, compared with 5.45 percent for asset-backed commercial paper that isn't extendible and 5.25 percent to 5.30 percent for corporate commercial paper, according to Lee Epstein, chief executive officer of Money Market One, a San Francisco-based broker-dealer of short-term securities.
Now, asset-backed commercial paper with a maturity of 30 days or less yields 6 percent on average, and corporate borrowers pay about 5.2 percent. Investors aren't buying extendible commercial paper.
Wall Street is in a ``financial panic'' and won't fund any mortgage bonds, even AAA rated bonds backed by prime home loans, said Garrett Thornburg, chief executive officer of Thornburg, which makes loans of more than $417,000 to people with good credit. The mortgages are known as jumbo loans because they exceed the limit on what Freddie Mac and Fannie Mae can purchase.
`Only Response'
Even the Fed's decision to cut the discount rate that it charges banks failed to revive demand. The rate for overnight borrowing in the asset-backed commercial paper market soared 0.39 percentage points to that price on Aug. 17, the biggest rise since the Sept. 11 terrorist attacks. Overnight yields fell 2 basis points to 6.01 percent today, while 30-day paper widened 9 basis points to 6.09 percent. A basis point is 0.01 percentage point.
``There's still a huge problem in the credit markets,'' Thornburg said in an interview. The market ``is unwinding because no one wants to own A1/P1 asset-backed commercial paper.''
Thornburg is using lines of credit for financing even though only 58 of its 38,000 mortgages are 60 days or more in arrears.
``That's just crazy,'' he said. ``If it's backed by subprime, all right. If it's backed by junk, get out. But if it's backed by high-quality receivables from Macy's or triple As from us, that market should be functioning and that market has stopped functioning.''
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .
Last Updated: August 21, 2007 10:25 EDT

[Finster]

Re: Fed Cuts Discount Rate

am i missing something? aren't asb yields supposed to go DOWN after the rate cut to reflect lower default risk? doesn't that imply the rate cut failured?

See Post 23 above. Yields went down on default-risk-free UST paper and up on most everything else. Perceived default risk on CP rose phenomenally.

There is also some confusion on causality involved. The Fed move is better thought of as a response to the upset in the credit markets. If one turns it around and views the illiquidity in CP as a reaction to the Fed move, it doesn't make sense. As Ayn Rand wrote, when faced with a contradiction, examine your premises.

[metalman]

Re: Fed Cuts Discount Rate

CP interest rates rise to attract investors back. Did the rate cut have enough effect to restore liquidity?

http://bloomberg.com/apps/news?pid=2...Roo&refer=home

am i missing something? aren't asb yields supposed to go DOWN after the rate cut to reflect lower default risk? doesn't that imply the rate cut failured?

[jk]

run on the banks

this might have had something to do with the fed's discount rate cut:
http://www.latimes.com/business/la-f...ck=1&cset=true

A rush to pull out cash

Worried about the stability of mortgage giant Countrywide Financial, depositors crowd branches. In Laguna Niguel, Bill Ashmore drove his Porsche Cayenne to the bank's office and waited half an hour to cash out $500,000. "It's got my wife totally freaked out," he said.
By E. Scott Reckard and Annette Haddad
August 17, 2007

Anxious customers jammed the phone lines and website of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.

Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable. And federal regulators said they weren't alarmed by the volume of withdrawals from the bank. [ jk comment- of course they weren't]

etc.

[Finster]

Re: Fed Cuts Discount Rate

CP interest rates rise to attract investors back. Did the rate cut have enough effect to restore liquidity?

The increase is even more significant in light of the incredible 50 basis point decline in one-year treasury rates in a scant one week. They closed last week yielding 4.69% and this week at 4.19%. Even as the FOMC kept its stated Fed funds target steady at 5.25% and only cut the discount rate by 25 basis points. Thus the "quality" spread widened phenomenally.

As for liquidity, first we need to ask whether it should be restored. At least to its former levels. Remember it has been a buzzword for months - not for its lack, but for its abundance. How much market angst is due to a true deficit of liquidity and how much due to its merely having become too accustomed to too much?

I referred to this as long ago as July 16, the very day before the Dow Jones Industrial Average peaked at its all-time intraday high of 14,022: "High liquidity is today's theme, but we need to anticipate tomorrow's. Liquidity will recede."

Little did I know how literally "tomorrow" it would turn out to be!

[bill]

Re: Fed Cuts Discount Rate

We have also been in constant communication with our sources.

As tempting as it is to obsessively watch the activity on the surface and to see the surface data as relevant, it's important to keep the key dynamic in mind that I mentioned in Financial Crashes are a Process, Not an Event.

One of the realizations that has not yet occurred is that Central Banks, while having a powerful psychological influence over markets have a far reduced real and direct influence over liquidity than during any previous credit crisis.

The credit markets and commercial banks are better able to handle the current instance because credit derivatives, in theory, flatten the markets and make them less prone to cascading defaults. Our theory of Risk Pollution, however, suggests that while credit dependencies are reduced, concentration of risk in the hands of weaker credit market participants is actually greater than before.

The most serious problem was pointed out by H. (Woody) Brock at Strategic Economic Decisions, Inc., that the level of risk in the credit markets can no longer be measured to close to the degree of confidence that was possible when credit was mostly created by banks versus the credit markets, and that which cannot be measured cannot be managed. Thus decisions in the credit markets are now being made blind, based almost entirely on gut, habit and instinct. While the rumor fly and mood swings from greed to fear and back again, overall the trend is toward greater risk aversion and thus all asset classes continue to sell as the de-leveraging continues. (De-leveraging means lower returns.)

The 1987 type event I warned July 25 is coming does not happen until the market participants lose confidence in the ability of central banks to control events. Typically this happens some time after several of the kinds of Fed interventions that we saw today in a 50 basis point discount rate cut. If a major revelation follows soon after, then market participants start to wonder if there is a bottom at all. That's when the shit really hits the fan. Now there's still hope, and as long as their is hope there will be high volatility but no 1,000+ crash days. But those days are coming.

CP interest rates rise to attract investors back. Did the rate cut have enough effect to restore liquidity?

http://bloomberg.com/apps/news?pid=2...Roo&refer=home

Asset-Backed CP Yields Rise in Face of Fed Rate Cut (Update2)

By Mark Pittman
Aug. 17 (Bloomberg) -- Asset-backed commercial paper yields soared by the most since the Sept. 11, 2001, terrorist attacks after the Federal Reserve cut its discount rate to try to calm financial markets.
Top-rated asset-backed commercial paper maturing Aug. 20 yielded 5.99 percent, up 39 basis points since yesterday and the most since a 45 basis point increase on Sept. 20 in the wake of the terrorist attacks in New York City and Washington.
Issuers are offering the highest rates in almost seven years to entice lenders who are trying to avoid taking mortgage- backed securities as collateral to avoid exposure to losses from U.S. subprime mortgage delinquencies.
The Fed's action ``may help add confidence that action will be taken when it's necessary, but further action is needed to actually offset the credit contraction we have had,'' Ashish Shah, global head of credit strategy at Lehman Brothers Holdings Inc. said in interview from New York. ``No one actually wants to tap the Fed window. So while this is good, it doesn't actually add any liquidity into the system. It's more of a confidence booster.''
Yields on asset-backed commercial paper rated A1, the second-highest at Standard & Poor's, and maturing the next day rose 39 basis points to 6.01 percent, the highest since January 2001, according to data compiled by Bloomberg. The increase is also the biggest since September 2001.
Removing the Stigma
Almost $44 billion in market value has already been lost on Merrill Lynch & Co.'s broadest index of floating-rate securities backed by home-equity loans. The index shrank to $635 billion on Aug. 16 from $679 billion in face value.
The Fed said today that while recent reports indicate economic growth continues at a ``moderate pace,'' risks to the expansion have risen ``appreciably'' and ``financial market conditions have deteriorated.''
The Fed is trying to encourage banks to buy commercial paper by allowing institutions to borrow for 30 days rather than overnight and making it renewable at the borrower's option, according to Drew Matus, an analyst at Lehman Brothers Holdings Inc. in New York.
The Fed's action ``essentially removes the stigma of accessing the discount window as well as providing a means of financing a wider range of collateral, Lehman said.
`Buyers' Strike'
Federated Investors in Pittsburgh is buying some asset- backed commercial paper because it's a good value, said Deborah Cunningham, chief investment officer for Federated who oversees $193.4 billion in money market funds including commercial paper.
``They are obviously sending a signal to the marketplace that, `We're in with you on this,''' said Cunningham.
The asset-backed market still ``lacks sponsorship'' and is having a ``buyers' strike,'' Mark Amberson, who runs the $5 billion Russell Money Market Fund for the Russell Investment Group in Tacoma, Washington, said in an e-mail. Amberson said he was enticed to buy some commercial paper at an overnight yield of more than 6 percent today and that he won't buy asset-backed debt maturing in more than seven days.
The Fed is trying to help find buyers for commercial paper after the market seized up this week for Countrywide Financial Corp., the biggest U.S. mortgage lender. Countrywide borrowed its entire $11.5 billion available in bank credit.
Countrywide turned to the emergency loan, which it said was provided by a group of 40 banks, a day after Merrill Lynch & Co. raised the prospect of bankruptcy for the Calabasas, California- based lender. Australia's Rams Home Loans Group Ltd. and Canada's Coventree Inc. also sought emergency funding today.
`Credit Spigot'
``Confidence equals liquidity,'' said Tony Crescenzi, chief bond market strategist for New York-based Miller Tabak & Co. and author of a 2007 edition of Stigum's Money Market, a textbook first published in 1978. ``Credit spreads will tighten and, with the Fed supplying credit, fears should subside and help to open the credit spigot again.''
Investors began to demand higher yields on asset-backed commercial paper conduits, some of which own mortgages, after BNP Paribas SA froze withdrawals from three investment funds that invested in subprime bonds. BNP's decision caused overnight lending rates between banks to soar and prompted the European Central Bank to lend 94.8 billion euros ($130.2 billion).
The gap between similarly rated asset-backed and direct- issued paper is 79 basis points, the most since Bloomberg began keeping the indexes in 1999. Sellers are offering direct-issued commercial paper at yields of about 5.2, the same as yesterday and down 5 basis points this week.
Commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables as well as car loans. Some of the programs are backed by subprime loans.
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net
Last Updated: August 17, 2007 16:38 EDT

[Andreuccio]

Re: Fed Cuts Discount Rate

EJ, where is that piece you wrote 7/25. I want to read it again, and I looked and couldn't find it. I am not adept at "Search."

Here you go, Jim.

http://www.itulip.com/forums/showthr...light=midnight

[Jim Nickerson]

Re: Fed Cuts Discount Rate

No. There has been no rate cut. The Fed cut the discount rate cut, just as we learned from Larry Meyer on the Goldman call Monday was Fed policy as an alternative to Fed funds rate cuts. There has been no Fed funds cut, which is what Cramer et al have been clamoring for, to stop the bleeding in the housing market. We won't get one until it's possible to do without tanking the bond market, which is still pricing in inflation.

Thanks, my brain is in hypo-function today. Been reading and writing too much rather than trying to think seriously.

[Jim Nickerson]

Re: Fed Cuts Discount Rate

this is what meyers suggested would happen according to ej's notes on the goldman conf call-- lower the discount rate but not the fed funds rate. the futures are pointing to a big pop in equities, and a resumption of dollar weakness. we'll see if it holds.

Based on the US$ index the hit has not been that bad, nor were most of the recent gains of the yen lost. I hope I wrote that correctly.

Anybody, what are the correct directions for the 10 and 30 year bonds? I look at Schwab's yield figures and they are up ~0.07% at 46.73-TNX and 50.00-TYX, yet the bond prices are up for the 10-year note and down for the 30-year bond?

Screwy.

[EJ]

Re: Fed Cuts Discount Rate

Nice, EJ, it's almost like Greenspan or Bernanke stepping up to the mike to calm the markets.

If I remember correctly Paus Kasriel and probably Bill Gross had predicted a rate cut in August. Most others, none of whom do I recall, gave up on their predictions and neither Kasriel or Gross to my knowledge have been making much noise about their prognostications not coming to pass.

Personally, I think most everything about Jim Cramer is bullshit as is time spent discussing him, but from what little I know, does not the rate cut vindicate Cramer's recent rantings?

No. There has been no rate cut. The Fed cut the discount rate cut, just as we learned from Larry Meyer on the Goldman call Monday was Fed policy as an alternative to Fed funds rate cuts. There has been no Fed funds cut, which is what Cramer et al have been clamoring for, to stop the bleeding in the housing market. We won't get one until it's possible to do without tanking the bond market, which is still pricing in inflation.

[Jim Nickerson]

Re: Fed Cuts Discount Rate

EJ, where is that piece you wrote 7/25. I want to read it again, and I looked and couldn't find it. I am not adept at "Search."

[Jim Nickerson]

Re: Fed Cuts Discount Rate

Nice, EJ, it's almost like Greenspan or Bernanke stepping up to the mike to calm the markets.

If I remember correctly Paul Kasriel and probably Bill Gross had predicted a rate cut in August. Most others, none of whom do I recall, gave up on their predictions and neither Kasriel or Gross to my knowledge have been making much noise about their prognostications not coming to pass.

Personally, I think most everything about Jim Cramer is bullshit as is time spent discussing him, but from what little I know, does not the rate cut vindicate Cramer's recent rantings?

[EJ]

Re: Fed Cuts Discount Rate

A day late as usual. Where was this brilliant, insightful advice yesterday when the DJIA was down 300 points?

Still, I don't think even yesterday was a wonderful buying opportunity. I nibbled on some REITs when they refused to go down while everything else was getting tossed out like last week's trash. But this last selloff was probably just the second salvo (February's was at least a foreshock) in a bear market with at least one or two more maulings ahead.

We have also been in constant communication with our sources.

As tempting as it is to obsessively watch the activity on the surface and to see the surface data as relevant, it's important to keep the key dynamic in mind that I mentioned in Financial Crashes are a Process, Not an Event.

One of the realizations that has not yet occurred is that Central Banks, while having a powerful psychological influence over markets have a far reduced real and direct influence over liquidity than during any previous credit crisis.

The credit markets and commercial banks are better able to handle the current instance because credit derivatives, in theory, flatten the markets and make them less prone to cascading defaults. Our theory of Risk Pollution, however, suggests that while credit dependencies are reduced, concentration of risk in the hands of weaker credit market participants is actually greater than before.

The most serious problem was pointed out by H. (Woody) Brock at Strategic Economic Decisions, Inc., that the level of risk in the credit markets can no longer be measured to close to the degree of confidence that was possible when credit was mostly created by banks versus the credit markets, and that which cannot be measured cannot be managed. Thus decisions in the credit markets are now being made blind, based almost entirely on gut, habit and instinct. While the rumor fly and mood swings from greed to fear and back again, overall the trend is toward greater risk aversion and thus all asset classes continue to sell as the de-leveraging continues. (De-leveraging means lower returns.)

The 1987 type event I warned July 25 is coming does not happen until the market participants lose confidence in the ability of central banks to control events. Typically this happens some time after several of the kinds of Fed interventions that we saw today in a 50 basis point discount rate cut. If a major revelation follows soon after, then market participants start to wonder if there is a bottom at all. That's when the shit really hits the fan. Now there's still hope, and as long as their is hope there will be high volatility but no 1,000+ crash days. But those days are coming.

[Finster]

Re: Fed Cuts Discount Rate

Just Wacthed "Cramer" That f*cking ,back stabing SOB got His way!
Oh Yes he now telling "Joe sixpack" to BUY in heavy!

One thing though, he said that if the FED had NOT cut rates the market would have imploded today (i think he right).

One day, one day we string up up you little turd!
Mega

A day late as usual. Where was this brilliant, insightful advice yesterday when the DJIA was down 300 points?

Still, I don't think even yesterday was a wonderful buying opportunity. I nibbled on some REITs when they refused to go down while everything else was getting tossed out like last week's trash. But this last selloff was probably just the second salvo (February's was at least a foreshock) in a bear market with at least one or two more maulings ahead.