Tuesday, March 11, 2008

Let the Bailouts Begin

We already know the Federal Home Loan Bank (FHLB--created by Congress during the early days of FDR's administration to shore up failing banks and provide money for housing) covertly provided a massive (public money) lifeline to Bankrupt Countrywide late last year, now the Fed & PPT are doing more of the same, but in a more overt and massive scale.

FHLB Loans to Countrywide
FHLB Atlanta had, according to the most recent filings with the Securities and Exchange Commission (SEC) made advances to Countrywide of 51.1 billion as of September 30 of this year. The company, widely regarded as the largest mortgage lender in the U.S., had pledged 62.4 billion of mortgages as collateral for the advances. These transactions represent 37 percent of the FHLB's total advances as of the end of the third quarter and 78 percent of Countrywide's total portfolio of mortgage loans.

Fed Plans to Lend $200 Billion to Banks
Scrambling to ease the strain on the credit market, the Federal Reserve announced a $200 billion program on Tuesday that would allow financial institutions, including the nation’s major investment banks, to borrow ultra-safe Treasury money by using some of their riskiest investments as collateral. Wall Street responded with a rally, with the Dow Jones industrials surging more than 400 points.

This was the central bank’s second effort in a week to unfreeze the nation’s panicky credit markets, where investors have become too frightened to finance even conservative debt offerings, which in turn has caused a cash squeeze at seemingly solid financial institutions.
Stock markets soared after the announcement, fell back in midday trading and then regained momentum in the afternoon. At the close, the Dow industrials were at 12,156.81, a gain of 416.66, or 3.6 percent. It was the biggest one-day point gain for the Dow since July 2002. The Standard & Poor’s 500-stock index was up 3.7 percent, and the Nasdaq composite index gained 4 percent.

The Fed normally lends Treasury securities to banks for just a few hours. Under the new program, money will be lent for 28 days and the central bank will accept nongovernment mortgage-backed securities — the source of the current crisis in the credit markets — as collateral. The Fed will require that the assets, which are linked to soured home loans, have a premium credit rating.

The new program, dubbed the Term Securities Lending Facility, will effectively allow strapped financial institutions to hand over potentially damaged securities to the government in exchange for either cash or easily traded Treasury securities, some of the safest in the market.
“If these institutions are able to extend out more credit as a result of this, it may take more pressure of the housing market and mortgage quality,” said Mark Zandi, chief economist at Moody’s Economy.com.

But Mr. Zandi said he was skeptical that the Fed’s actions would address the root of the current problems in the credit market.

“I don’t think it helps determine the appropriate price for these securities,” he said. “It doesn’t solve the underlying problem of mortgage delinquencies and defaults, which could at some time threaten the Triple-A securities.”

The Fed will lend the Treasuries through weekly auctions that begin March 27. The government will also accept mortgage-backed securities issued by government-sponsored companies like Fannie Mae and Freddie Mac.

Last week, the central bank said it would offer up to $100 billion through a new auction program that allows financial firms to take out loans at wholesale rates.

On Tuesday, the Fed also increased currency swap lines with the European Central Bank and the Swiss National Bank, to $30 billion and $6 billion. That is an increase of $10 billion for the European Central Bank and $2 billion for the Swiss bank.

Well folks, I think we're merely seeing the first stages of the bailouts I wrote about last weekend: Final US Economic End-Game.

Much more to come as the dollar is printed/injected to oblivion


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