Saturday, May 03, 2008

News Roundup

Fed Revs Up Lending in Latest Jolt to Credit Market

May 2 (Bloomberg) -- The Federal Reserve, seeking to prevent a deeper economic slowdown, took another stab at coaxing banks into lending at lower rates.

The Fed boosted its biweekly Term Auction Facility sales of cash to banks by 50 percent to $75 billion and expanded the collateral it takes from bond dealers through loans of Treasury securities. It also raised the amount of dollars it makes available to the European Central Bank and Swiss National Bank through swap lines to a combined $62 billion from $36 billion.

Borrowing costs for banks have risen as much as 0.38 percentage point in the past six weeks, an increase that blunted the impact of the cash injections that began in December. The strains threatened to further impair mortgage markets, worsening an economy where growth has already stalled.

``The world is awash in liquidity, it just isn't reaching the right financial borrowers,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``Today's action from the central banks is another strong dose of medicine that will help cure what ails the credit markets.''

Fed officials also expanded the collateral they accept under the Term Securities Lending Facility to include AAA rated asset- backed investments. About 95 percent of outstanding student-loan securities are AAA, according to the American Securitization Forum. Democrats in Congress had pushed Chairman Ben S. Bernanke to take student-loan bonds on the central bank's balance sheet.

Policy makers and economists have cited the rise in the London interbank offered rate for dollars as evidence of banks' and investors' concerns about lending to counterparts. Eric Rosengren, president of the Boston Fed, said in a speech last month that Libor has ``been elevated since the onset of financial problems'' in July.

Evidence thus far is that these auctions have had very limited impact in bringing down these still-elevated credit spreads. There still remains a tremendous reluctance on the part of financial institutions to lend to one another.''

S&P Cuts Countrywide's Credit Rating to Junk Status

Financial markets have been on a winning streak lately, but land mines lurk.

Two of them resurfaced Friday, when credit-rating services downgraded the debt of a pair of big of mortgage lenders, Residential Capital LLC and Countrywide Financial Corp.

ResCap's credit rating was cut deep into "junk" territory after it unveiled plans to restructure $14 billion of debt and possibly borrow billions more from its parent, GMAC LLC.

Countrywide's debt rating was slashed to junk from investment grade by Standard & Poor's after Bank of America Corp. said it isn't sure it will stand behind roughly $38 billion of Countrywide ...

ResCap ratings cut on refi plans

Residential Capital LLC, the mortgage arm of finance company GMAC, was cut deeper into junk territory on Friday after the company announced a debt exchange designed to relieve itself of near-term debt maturities.

Moody's Investors Service, Standard & Poor's and Fitch Ratings all said they expect to cut the company's debt to default when the tender is completed.

Oil Rises More Than $3, Most in a Month, on U.S. Jobs Report

May 2 (Bloomberg) -- Crude oil rose more than $3 a barrel in New York, the most in month, after a report showed that the U.S. lost fewer jobs than forecast in April and as Turkey renewed its military offensive against Kurdish rebels in Iraq.

Linens 'n Things files Chapter 11, will close 3 Silicon Valley stores

Home furnishings retailer Linens 'N Things filed for Chapter 11 bankruptcy protection Friday and said it will close 120 underperforming stores as part of its restructuring, including stores in 27 California locations.

Clifton, N.J.-based Linens Holding Co., parent of the chain, said the Chapter 11 filing was largely the result of the economic downturn.

"The significant deterioration in the mortgage, housing and credit markets and the resulting impact on the retail marketplace, particularly the home sector, has overwhelmed the operating and merchandising improvements that we have made over the past two years," said Robert J. DiNicola, Linens Holding executive chairman, in a release. "We are making the strategic decision to use a Chapter 11 filing to proactively address our capital structure and ensure that our stores will remain well stocked while we work through the steps to align the capital structure of the company with the realities of today's business environment."

Asia Getting Fed Up With Bernanke's Rate Cuts

Chalongphob Sussangkarn knows a thing or two about volatile currency markets.
Until February, he was the finance minister of Thailand, which over the last decade saw its currency plunge too low and surge too high.

``I should just get rid of these dollars before they fall even more,'' joked the president of the Thailand Development Research Institute, as we exchanged U.S. currency for euros.

Thailand's currency, the baht, has risen 16 percent against the dollar over the past 18 months, part of an Asia-wide trend. Hastening the dollar's slide is a Federal Reserve set on avoiding recession at all costs. On April 30, the Fed lowered its benchmark interest rate by a quarter point to 2 percent, the seventh cut since September.

While the Fed hinted it may be ready to pause, the amount of monetary stimulus in the pipeline is a growing threat to Asia. One immediate side effect is rising currencies, which poses challenges for Asia's export-dependent economies.

The bigger issue is that easy money is fueling global inflation.

``With inflation running very high in most countries, the ability of central banks to reduce interest rates to offset the impact of the U.S. slowdown is going to be constrained,'' says Subir Gokarn, Tokyo-based Asia-Pacific chief economist at Standard & Poor's.

Fed Chairman Ben Bernanke acts in the U.S.'s interest. Yet the Fed's cuts are adding ever more liquidity to global markets. While bad weather and the increased use of biofuels explain part of the run-up in food prices, rising oil costs are as a much a consequence of liquidity as demand.

Asia is on the front lines of the phenomenon, especially with investors like Mark Mobius betting on more rate cuts. Mobius, who oversees $47 billion in emerging-market equities at Templeton Asset Management Ltd., says Bernanke may cut rates to 1 percent as U.S. housing foreclosures worsen.

Central bankers in Asia could be excused for feeling a bit, well, fed up by sliding U.S. rates. Their concern is over ``hot money'' flows of the kind that wreaked havoc in Asia a decade ago. Investors who had poured in amid rapid growth fled even faster at the first sign of trouble. Large amounts of the liquidity created by the Fed are heading Asia's way to tap its rapid economic growth.

The meltdown at Bear Stearns Cos. in March raised the stakes as the Fed stepped up its campaign of rate cuts. Asia was already awash in money thanks to the Bank of Japan. Even though Japan has been growing steadily since 2002, the BOJ's key lending rate is still a mere 0.5 percent.

Excess liquidity is dovetailing with Asia's record buildup of currency reserves. China, Japan, Taiwan, South Korea and India hold a combined $3.5 trillion of reserves. There's increasing evidence that Asia's currency holdings are seeping into the money supply, adding to inflationary pressures.

In a perfect world, economists would be predicting aggressive rate increases in Asia. Yet with more that two-thirds of the world's poor living in the region, central banks may be reluctant to slam on the brakes.

There can be little doubt inflation concerns will dominate the Asian Development Bank's annual meeting, which begins this weekend in Madrid. The ADB predicts inflation in Asia will reach a decade-high this year even as economic growth cools.

``It's hard to exaggerate how much of a problem rising inflation is to Asia's short-term stability and longer-term prosperity,'' ADB Chief Economist Ifzal Ali told me in Tokyo last month. ``It really is THE issue.''

What ails the U.S. is too much consumption, too much debt, too little household savings and a financial system that's more vulnerable than once thought. Fixing these imbalances will require strong action from lawmakers and economic officials -- not more liquidity.

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