[lbo-talk] the Fed's action today

Doug Henwood dhenwood at panix.com
Wed Dec 12 20:29:08 PST 2007


[This is from Merrill Lynch's chief economist, David Rosenberg, who's been among Wall Street's biggest bears for quite a while. His basic message: it's something, but nowhere near enough.]

Fed's action will do little to alleviate credit crunch

In a nutshell, the Fed's newly created Term Auction Facility that was unveiled today combines the qualities of the regular repo operations with the wider collateral base at the discount window - but at a lower market-determined rate (compared to the discount rate) and a broader level of participation among depository institutions than is seen at normal repo operations.

While innovative and global in scope insofar as other central banks are engaging in similar measures, as well as being a much better way to attack the liquidity problems than through the old "tool box", this is really a temporary stopgap since this is still roughly one- month term funding.

We still believe that this new facility will do little to alleviate the credit crunch and heightened recession risks. The size of the auctions are actually fairly small in light of the overall credit situation and in no way does this solve - or is intended to solve - the massive writedowns and losses the banking sector is likely going to incur this cycle.

What did the Fed exactly do today? The details:

As we suggested last week, the Fed made changes to its open market operations by adopting an auction-style facility - called the Term Auction Facility (TAF), which could significantly reduce funding pressures in the interbank (LIBOR) market, at least over the near- term. The auction facility will widen both the collateral base accepted by the Fed, compared to its regular repo operations, and extend the number of financial institutions that can participate.

Currently, the regular repo operations only accept Treasuries, Agencies and Agency-backed MBS as collateral from a small group of so- called primary dealers. The auction facility will accept the same wide base of collateral that is accepted at the discount window at the primary credit level, which importantly includes high-rated private label MBS and CDOs with AAA ratings.

See the below link for a full list of what the Fed accepts at the discount window and the "haircuts" [discounts] applied with each collateral class.

http://www.frbdiscountwindow.org/discountmargins.cfm?hdrID=21&dtlID=83



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