Interest Rate Roundup

Wednesday, December 12, 2007

More details on the Fed move, and more credit warnings

I don’t know about you. But I can’t recall a wilder ride in the financial markets -- or a crazier time in financial policy making -- than right now.

Just yesterday, Federal Reserve policymakers essentially told the market to shove it. They delivered twin quarter-point cuts in the federal funds rate and the discount rate, not the 50-point cuts that many investors were looking for. That caused the Dow Jones Industrial Average to tank by almost 300 points.

Then less than 24 hours later, the Fed skipped the “big guns” stage and reached right for a monetary policy howitzer. It said that it’s coordinating with the Bank of Canada, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank (SNB) to flood the banking system with money.

The Fed will auction a minimum of $40 billion in funds to banks, and accept all kinds of collateral in return, in an effort to ease the logjam in the money markets and shore up bank balance sheets. It’s also authorizing currency swap lines with the ECB and SNB that will channel tens of billions of dollars to banks based in those central banks’ jurisdictions.

How unprecedented is this kind of thing? I haven’t seen anything like it since right after the 9/11 attacks or late 1999, when the Fed was worried the Y2K computer bug would cause the banking system to go haywire. And even those moves weren’t as aggressive as what the Fed is doing now, in my view.

Here are some more details on this plan from the Associated Press, Bloomberg, and the Wall Street Journal.

A funny side note: I don't know if this plan was announced sooner than the Fed wanted (because of the Dow swan dive yesterday) or not. But the PDF document with the Federal Register Notice announcing the plan has "XXs" in it. Specifically, it says (as of 11 a.m. or so on 12/12):

"DATES: The amendments to part 201 (Regulation A) are effective XXX."


"By order of the Board of Governors of the Federal Reserve System, XXX."

Meanwhile, in credit quality land, check out the news from ...

* BAC: Bank of America said Q4 earnings will be "quite disappointing," with credit market losses higher than the bank's $3 billion previous estimate. The bank also said that writedowns on things like Collateralized Debt Obligations, or CDOs, are "unknowable." That's encouraging, eh?

* WB: Wachovia said it will likely double its Q4 loan loss provision to $1 billion from a previous forecast of $500 million to $600 million. The firm's CEO called this the "toughest" banking environment he's seen in 32 years of banking. What a stroke of genius it was for these guys to acquire option-ARM, California-focused lender Golden West Financial around the peak of the housing bubble.

* PNC: PNC Financial Services, which is the biggest bank in Pennsylvania, said earnings per share will come in between $1 and $1.15 vs. expectations of $1.41. The bank raised its loan loss provision by $45 million due to increasing problems with real estate development loans in Maryland and Virginia. It also wrote down the value of commercial mortgages it's carrying in its held for sale portfolio and said trading results weren't up to snuff due to "unprecedented market price volatility."


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