Fed to Purchase Commercial Paper and Other Central Bank News

The Fed has announced that it will be purchasing commercial paper.  The new program, the Commercial Paper Funding Facility (CPFF) will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers (US issuers rated A1/P1/F1.)  This plan directly addressed the funding problems of US corporations that are suffering increased borrowing costs due to mess on Wall Street.  The CPFF is a far more efficient way to keep the US economy from entering a depression than the indirect $700 billion bailout.      

Meanwhile, across the pond, a report that the UK government may invest at least 45 billion pounds in three of the country's biggest banks to bolster capital sent UK bank stocks sharply lower.  Royal Bank of Scotland plunged as much as 39% at one point on a downgrade and speculation that the bank had approached the government asking for a capital injection.  Although RBS denied that it had approached the government hat in hand, its shares remained battered.

Overnight interbank lending rates increased again despite the Fed's best efforts to pump liquidity into the money markets.  The Fed released the schedule for the 28-day and 84-day loans to dealers that it plans to auction through the Term Auction Facility (TAF.)  The first $150 billion auction was conducted yesterday with results expected to be announced today.  The equity markets were disappointed when the Fed announced the TAF schedule instead of a global coordinated central bank interest rate cut.  Index futures sold off on the release of the TAF.      

Although common knowledge to those who follow the credit markets, those who don't regularly read the back pages of the Financial Times may not know that the Iceland banking sector is blowing out.  The currency has been in a tailspin, the government was forced to nationalize its second-largest bank and it is supposedly in talks with Russia for a 4 billion euro loan.  Yesterday trading in shares of major banks was suspended and the government declared that it would guarantee all domestic deposits.  Well, actually, it appears as if Russia will guarantee all domestic deposits if Mr. Putin is kind enough to grant Iceland a loan.

And Australia slashed interest rates by 1%.   

That may cover all the highlights.  Phew!  More to come...