Saturday, August 18, 2007

The fed statement

This is the Fed statement concerning the 0.50% cut in the discount window rate...

"... To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility.

The Board approved a 50 basis point reduction in the primary credit rate to 5-3/4 percent, to narrow the spread between the primary credit rate and the Federal Open Market Committee's target federal funds rate to 50 basis points.

The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower. (ie forever) These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially.

These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. (ie we take all the crap you can shove to us for $$) Existing collateral margins will be maintained.

In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York and San Francisco..."

As I have said previously...


as a bear, got punched below the belt.

Well, fundamentals still with us... The trend is our friend.

Financial firms such as mortgage lender cannot securitize its mortgage to re sell and are stuck with the loans on their books.

Investment banks cannot securitize its loans to private equity funds doing M&A, and are stuck with those loans on their books.

Hedge funds/Mutual funds are facing redemption galore, and they are holding a lot of collateral which they still have to mark to market, or have no market to mark value to. They don't know how much the assets in the funds are worth!

Commercial banks with their credit lines extended to the aforementioned financial institutions are stuck.

It is a question of solvency, not liquidity... This is not Hang Seng Bank of the 60s... This is BCCI of the 90s!

Now... Why is it solvency? FALLING HOME PRICES... NO more mortgage equity withdrawals.

Nothing has changed...


An alternative view from Roubini's blog entry dated 16th of Aug

"...Friday Morning Update: The Fed just announced a 50bps cut of the discount rate from 6.25% to 5.75%.

Apart from the psychological effect - higher probability now of a Fed Funds cut rate and signal that the Fed cares about this financial turmoil - this cut of the discount rate is mostly cosmetic as very few banks access the discount window.

More importantly, the Fed extended the normal term of lending to banks from overnight to 30 days. And the FOMC statement effectively has changed the Fed policy to an easing bias. At this point a 25bps Fed Funds cut at the September meeting is almost sure; and an inter-meeting cut is possible if financial conditions deteriorate before the September meeting..."


  1. 聯儲局真的行至最後減息一步



  2. I think the Fed aims at the credit crunch rather than the subprime issue by taking this step.

    If they want to help the subprime lenders, they could just lower the Fed Fund rate, which is the base rate for ARM.

    Pakman is right. Fundamental is with us. At the end of the day, someone is still gonna find his borrowers default and has to take the loss. This amount itself is already huge, not to mention the contagious effect.

  3. Lender's collapse costs 6,000 jobs in U.STucson-based First Magnus laid off 700 out of 800 here

  4. Econ 101 alert!

    Price is a reflection of information.

    Price of investment items such as equity/shares or bonds, are a reflection of information that helps to predict the future.

    Therefore, information is key. But there are so much information to digest, so... there are people who tries to make it easier to digest information, they are the rating agency Moody's + S&P etc...

    The problem right now is Moody's and s&p cannot porivde accurate ratings.

    So... in order to restart trading, the key is to make sure rating agency's rating is CREDIBLE

    Therefore, the carnage will stop when the rating agency takes their re-rating pen and DOWN GRADE EVERYTHING, till the ratings are credible.


  5. i Was in tucson b4...

    For like one night. Hung out with a friend at tucson and Nogales...