9/29T9:59 News & Notes

http://www.nytimes.com/2008/09/28/business/28melt.html?hp
Brilliant article explaining the AIG collapse as a result of credit default swaps.

http://www.bloomberg.com/apps/news?pid=20601213&sid=aWTSSbHblM74&refer=home
The effects of the credit crisis on the Muni Bond market
RCM Comment: One of Wall Street's most profitable functions has always been as a market maker of municipal debt instruments. There are 10's of thousands of different issues of varying maturities that would have no home without brokerage firms' willingness and ability to commit capital to carry municipal inventories. With the spreading capital destruction throughout the banking and brokerage community municipal debt inventories have become a primary casualty. As a result muni prices are declining and muni interest rates are climbing steadily higher. Unfortunately, for many municipalities the rising cost(interest rates) comes at a particularly poor time as revenues are under pressure from the housing decline. This formula has already produced a number of municipal bankruptcies this year. Unless this trend is reversed soon we believe municipal bankruptcies are likely to ascend to the top of Washington's agenda in the not to distant future.

Gold and silver dealer reports an ‘unprecedented’ shortage of metals Sunday, September 28, 2008 By David Clerkin, Markets Correspondent
‘‘This did not happen even in the 1930s and the 1970s, and will result in markedly higher prices in the coming months.”
A surge for demand in gold and silver has resulted in an unprecedented shortage of the metals for retail investors in recent days, according to Gold and Silver Investments, a Dublin-based firm that allows retail investors to speculate on movements in the value of precious metals.
Gold and Silver Investments director Mark O’Byrne said the supply of gold and silver available for small retail investors suffered a dramatic deterioration within hours on Friday, as wholesalers reported that government mints and refiners, the primary suppliers of the metals, had stopped offering new supplies.
‘‘It’s absolutely unprecedented,” said O’Byrne, who said the shortages were likely to drive up the costs of gold and silver in the secondary market.
‘‘This did not happen even in the 1930s and the 1970s, and will result in markedly higher prices in the coming months.”

RBC says that with legislation agreed upon, congress expected to pass T.A.R.P. bill within days; implementation several weeks away
RBC says the Troubled Asset Relief Program will be funded in three tranches; immediately with $250 bln, followed by $100 bln and finally with $350 bln (subject to Congressional disapproval). The second and third tranches need additional oversight to be funded. The Treasury's purchase authority will last two years. T.A.R.P. will be targeted to purchase residential and commercial whole loans and securities originated or issued on or before March 14, 2008. Plus any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability.

Iceland takes control of Glitnir - Guardian Unlimited
Guardian Unlimited reports the Icelandic government has seized control of one of the nation's biggest banks, Glitnir, the latest victim of the crisis gripping the world's financial markets. The move will stoke long-held fears that Iceland could be facing financial ruin. Officials said the government in Reykjavik had bought a 75% stake in the bank for €600 mln to prevent it from going bust.

ECONX Federal Reserve and other central banks announce further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity
In response to continued strains in short-term funding markets, central banks today are announcing further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures. Federal Reserve Actions The Federal Reserve announced today several initiatives to support financial stability and to maintain a stable flow of credit to the economy during this period of significant strain in global markets. We will continue to adapt these liquidity facilities as necessary and will keep them in place as long as circumstances require. Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmarks Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously. These steps are being undertaken to mitigate pressures evident in the term funding markets both in the United States and abroad. By committing to provide a very large quantity of term funding, the Federal Reserve actions should reassure financial market participants that financing will be available against good collateral, lessening concerns about funding and rollover risk. 84-Day Maturity TAF Auctions The increase to $75 billion per auction will triple the supply of 84-day maturity credit to $225 billion from $75 billion. TAF credit at the 28-day maturity will remain at $75 billion. The total amount of TAF credit available in the 28-day and 84-day auction cycles will double to $300 billion from $150 billion. Forward TAF Auctions The forward TAF auctions are a new program designed to provide reassurance to market participants that term funding will be available over year-end. The timing and terms of the two forward TAF auctions will be determined after consultations with depository institutions that utilize the TAF program. It is anticipated that there will be two auctions in November totaling $150 billion. These auctions will provide short-term (one- to two-week term) TAF credit over year-end. Foreign Exchange Swap Lines The Federal Open Market Committee (FOMC) has authorized a $330 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide funding for U.S. dollar liquidity operations by the other central banks. The FOMC has authorized increases in all of the temporary swap facilities with other central banks. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $30 billion by the Bank of Canada, $80 billion by the Bank of England, $120 billion by the Bank of Japan, $15 billion by Danmarks Nationalbank, $240 billion by the ECB, $15 billion by the Norges Bank, $30 billion by the Reserve Bank of Australia, $30 billion by the Sveriges Riksbank, and $60 billion by the Swiss National Bank. As a result of these actions, the total size of outstanding swap lines is $620 billion. All of the temporary reciprocal swap facilities have been authorized through April 30, 2009. Dollar funding rates abroad have been elevated relative to dollar funding rates available in the United States, reflecting a structural dollar funding shortfall outside of the United States. The increase in the amount of foreign exchange swap authorization limits will enable many central banks to increase the amount of dollar funding that they can provide in their home markets. This should help to improve the distribution of dollar liquidity around the globe.
RCM Comment: Combine "expand significantly" & "US-dollar liquidity" in the same sentence and you get another way of saying, BUY GOLD!!!

ECB to offer banks extra cash through end of year - Bloomberg.com
Bloomberg.com reports the European Central Bank said it will make additional funds available to banks through the end of the year in "special'' auctions to ease tensions on euro-region money markets. The Frankfurt-based ECB said it will loan banks extra cash today for 38 days. "The special term refinancing operation will be renewed at least until beyond the end of the year,'' it said in a statement. Bids must be submitted by 1 p.m. Frankfurt time. The world's largest central banks are injecting liquidity into money markets as more than $550 bln in writedowns and losses tied to the U.S. mortgage market prompt banks to stockpile cash to meet their own funding needs. The ECB said it will continue "to steer liquidity towards balanced conditions in a way which is consistent with its objective to keep very short-term rates close to the minimum bid rate'' of 4.25%. Today's auction will be conducted at a variable rate with no pre-set amount, the ECB said.
RCM Comment: Last week the ECB tried to say the problem in Europe was not as acute as the US. This week they are singing a new tune. Question: Are central bankers around the world: A) Clueless B)Delusional C) Diabolical. You can find the answer in tomorrow's blog.