Please sir, may I have some more?
Tuesday, March 11, 2008
Between calls to their brokers, investors had little time during Tuesday’s stock market rally to ask themselves one important question: Is the Federal Reserve’s latest attempt to free up credit markets big enough?
David Rosenberg, North American economist, believes the answer is No. The Fed introduced the Term Securities Lending Facility, which will lend up to $200-billion (U.S.) to primary dealers – essentially swapping U.S. Treasury securities for unwanted Federal agency debt and agency residential mortgage-backed securities, for a period of 28 days.
Other central banks, including Canada's, have followed suit with similar liquidity injections, triggering a stock market rally.
But Mr. Rosenberg points out that $200-billion is chicken feed next to the $6-trillion market for total mortgage-backed securities (MBS).
“As with the other liquidity measures introduced, the new facility will not alleviate the current credit crunch or economic recession, in our view,” he said. “The size of the auctions, while sizable in terms of the Fed’s balance sheet, 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 in the banking sector that are ongoing in this cycle.”
What’s next? Mr. Rosenberg said that there is speculation the Fed could start buying agency debt itself, which it hasn’t done since 1999, or even buy agency-MBS, though he is not hopeful.
“Also garnering a lot of attention is the possibility that the Fed could decide to lend directly to non-banks via the TAF (Term Auction Facility), something they last did in the 1930s. We cannot rule out that the Fed would be forced to revive this option, but the benefits of such action would need to be weighed against the headline shock of bringing back a Depression-era measure.”
© Copyright The Globe and Mail
Stocks jump on credit bailout
TheStar.com - Investing -
Stocks jump on credit bailout
Days of sharp sell-offs turn to major investor gains after central banks pour billions into loan markets
March 12, 2008 Madhavi Acharya-Tom YewBusiness Reporter
Stock market investors rejoiced yesterday as central bankers around the world, including Canada, announced plans to help ailing financial markets with a huge injection of cash.
But economists say that while the latest intervention may soothe jittery credit markets for the time being, it won't be enough to cure the U.S. economy.
The Bank of Canada said it would enter into 28-day purchase and resale agreements for $2 billion on March 20 and another set for $2 billion on April 3.
The Bank of England, the European central bank, the U.S. Federal Reserve, and the Swiss National Bank also announced similar measures.
Canada's contribution is tiny compared to the U.S. Federal Reserve, which will lend up to $200 billion of Treasury securities for 28 days.
"It's primarily a U.S. move and we're doing a small part. I think that's appropriate," said Don Drummond, chief economist at TD Bank Financial Group. "The financial problems are much more serious in the United States."
Stock markets soared on the news, and the gains strengthened through the day. In Toronto, the S&P/TSX composite index gained 2.61 per cent, or 339.44 points, to finish trading at 13,344.53.
In New York, the blue-chip Dow Jones industrial average gained 416.66 points, or 3.55 per cent, to finish at 12,156.81.
The S&P 500 index closed at 1,320.65, up 47.28 points, or 3.71 per cent.
The gains helped turn around days of sharp market sell-offs, led by financial sector stocks, as another, so-called third wave of credit fears has made lenders very uneasy. There are renewed worries that big Wall Street investment firms are facing liquidity issues as they take massive writedowns for housing and mortgage assets related to subprime borrowing.
Banks tightened their lending after the U.S. market for subprime borrowing collapsed last August, making it difficult for companies to get their hands on short-term financing.
As the signs pile up that the U.S. economy is headed for trouble – slowed consumer spending, record high gasoline prices, and a housing slump – banks are still reluctant to lend.
"This is a tourniquet, it will staunch the bleeding, but it may not turn us around and bring the patient to health," said Susan Wachter, real estate and finance professor at The Wharton School, University of Pennsylvania.
The same central banks also co-ordinated a similar liquidity injection in December to help companies with end-year needs for extra cash.
"Pressures in some of these markets have recently increased again," the Bank of Canada said in a release yesterday.
"We all continue to work together and will take appropriate steps to address those liquidity pressures."
In Canada, banks and financial institutions put up government or provincial bonds, or a few other select securities, and in exchange, they get cash from the Bank of Canada for 28 days.
The Fed said also it would make U.S. treasury securities available to cash-strapped banks through weekly auctions for 28 days, rather than the traditional overnight period.
"The fact that it's 28-day loans instead of overnight should help it have some impact but let's face it, this is not the be-all and end-all of curing U.S. woes," Drummond said.
"That's going to be a long time in the making and will take more than something like this."
With files from the Star's wire services
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