9/16T8:18 News & Notes

News:

Lending among banks freezes - WSJ
WSJ reports banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday, threatening to spread the troubles of American International Group and Lehman Brothers to a broad range of financial institutions and the global economy. The breakdown came despite efforts by central bankers to keep money flowing. Central banks in the U.S., Europe and Japan pumped tens of billions of dollars each into the banking system. The Federal Reserve, while declining to lower its benchmark interest rate at a regular meeting Tuesday, said it will "act as needed" to combat ills including tight credit and the still-declining housing market. In one stark sign of waning confidence, the overnight London interbank offered rate, or Libor, a benchmark reflecting the rates at which banks lend to one another, more than doubled, in its sharpest spike on record. Longer-term Libor rates also rose sharply. If sustained, that move will push up payments on billions of dollars in mortgages and corporate loans that are linked to Libor. RCM Comment: This is a great gauge of the real problem. As long as LIBOR keeps moving higher and banks won't lend to each other this financial crisis will continue.

AIG American Intl: Details of Fed loan to AIG & U.S. govt's 80% equity interest in co (3.75 ) -Update-
Last night the Federal Reserve Board, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 bln to AIG under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers. The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance. The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 bln under the facility. The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm's assets. The U.S. government will receive a 79.9% equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders... AIG subsequently issued a statement saying its "Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG"... AIG stock is trading down 32% in pre-mkt trading, currently at $2.51.

Banks, lawmaker push SEC to curb illegal shorting - Reuters.com
Reuters.com reports a U.S. banking group is pressing securities regulators to clamp down on illegal short-selling after weeks of heavy selling pressure on shares of financial companies. The American Bankers Association said many of its members have seen precipitous declines in their stock, high trading volumes and huge spikes in so-called failures to deliver, leading them to conclude that their stock is being manipulated. The SEC expects to issue new rules against abusive short selling within 24 hours, an SEC spokesman said late Tuesday. However, the banking association said it feared the steps would not be enough. "We are concerned that the commission's forthcoming action will not go far enough to protect banks and bank holding companies from these abusive and manipulative practices," the ABA said in a letter to banking regulators. RCM Comment: This action helped add fuel to the last rally in the middle of July. Will it work this time?

RSX Russian markets halted as emergency funding fails to halt rout - Bloomberg.com (28.11 )
Bloomberg.com reports Russian mkts stopped trading for a second day after emergency funding measures by the govt failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago. The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6% gain and plunged as much as 10% within an hour. The benchmark fell 17% yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001. The dollar-denominated RTS halted trading after similar declines. The govt yesterday injected $20 bln into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up in the wake of the Lehman Brothers bankruptcy. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08%. The Finance Ministry attempted to stop the selloff by offering 1.13 trln rubles ($44 bln) of budget funds to the country's three biggest banks, OAO Sberbank, VTB Group and OAO Gazprombank, for at least three months. That measure came as KIT Finance, a Russian brokerage, said it's in talks to find a buyer after failing to meet some financial obligations related to repurchase agreements.
RCM Comment: This is one of the reasons for the massive repatriation going on and the subsequent US$ rally.