Friday August 17 – No one leaves unscathed
"It's really troubled. Everything is being tarred with the same brush and investors in funds that buy commercial paper are ringing and asking: 'You're not in that asset backed CP are you?' And if funds have bought ABCP, investors don't want to hear about whether it's good ABCP or not, they're out of there"
So Bernanke blinked. One week on from the start of giant central bank liquidity injections and deus ex machina time rolls round again. The morning clouds lift with news that the Federal Reserve is cutting by 50bp the discount rate at which banks can raise emergency funds to 5.75% from 6.25%, leaving it just 50bp above the Fed funds rate, which is the general base rate.
In addition, it is to widen eligible collateral for these loans to include certain mortgage-backed securities. News emerges of a conference call this morning between Fed officials and the CEOs of leading financial institutions including Bank of America’s Ken Lewis, Citi’s Chuck Prince, JPMorgan’s Jamie Dimon and Lloyd Blankfein of Goldman Sachs. In the days ahead, the Fed will press the country’s leading banks to make use of this facility even if they don’t face a funding emergency, in an effort to remove the stigma associated with drawing on it. Of course, this fools no one. The banks are desperate to point out it is a symbolic gesture and the market is poised to flee from any smaller institution that is known to have used the discount window.