Friday, October 31, 2008

Libor Dropping, Drastic Fed Actions Finally Working

Three-month Libor fell again to 3.03%, the 15th consecutive drop, indicating that the Fed's dramatic actions are making a difference.  Make no mistake, however, the Fed's actions are dramatic with a capital "D."  Yesterday's release of the Fed's balance sheet showed it ballooning to $2 trillion.  As of October 29th, the Fed had lent $145 billion out of its new commercial paper facility directly to companies which had been shut out from raising short-term financing due to the seizure in the credit markets.  For those unfamiliar with this new facility, it is the first time that the Fed has lent money directly to companies that are not banks (excluding AIG, of course) since the Great Depression.  Other than the new commercial paper funding facility, borrowings from the various other facilities remained relatively unchanged, give or take a couple billion here and there.  
AIG's borrowings declined a bit.  Well, sort of.  It paid back some of the expensive 8.5% money from the special loan it was granted by the Fed, by borrowing from the new commercial paper funding facility at rates of 2-3%.  You can't fault the insurer from trying to reduce its funding costs.  Sadly, there are many other things to fault the insurer for, which require a completely new post (coming soon.)  
In any event, less stress in the money markets is extremely positive news.  Although it doesn't mean the Dow will race right back to 14,000, it does significantly reduce the probability of solvent companies facing bankruptcy because they cannot access short-term financing to run their day-to-day operations.  It also means that every company with an unused revolving borrowing facility doesn't have to draw it down fully from its bank out of sheer panic, thus causing further stress on the banking system.  It is true that we have yet to return to normal business conditions, for without the Fed, we would be facing global banking failures and bankruptcies left and right.  But at least we have stepped back from the precipice.   

No comments: