10/6T9:45 News & Notes

Overnight interbank calmer but overall lending still frozen - Reuters.com
Reuters.com reports the cost of borrowing overnight funds on international money markets remained close to central banks' targets on Monday thanks to continued liquidity injections but lending was virtually non-existent across all maturities. More governments across Europe moved over the weekend to assure savers their deposits are safe, which helped swell banks' deposits and on the margins reduced the need to tap central banks for ultra short-term euro funds. But demand for dollars remained strong. The injection by the European Central Bank and Bank of England of a combined $60 billion of overnight funds into the banking system was oversubscribed, particularly from euro zone financial institutions. Spreads between bid and offer rates of up to 200 basis points on overnight dollar deposits, for example, reflected just how little lending is being carried out even at these short maturities, traders said. Overnight dollar deposit rates were indicated around 1.0-2.5% in London, holding close to the Federal Reserve's 2% target rate and well down from levels of over 10% seen in September after the demise of Lehman Brothers. Overnight euro deposit rates were indicated in a range of 3.75-4.35%, close to the ECB's base rate of 4.25%.
RCM Comment: This key indicator remains negative. We can ignore all stories of bottoms in the market as long as interbank lending is frozen.

Fed may see lending to companies, states as next crisis fronts - Bloomberg.com
Bloomberg.com reports Federal Reserve Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be just as chilling as last month's downfall of Wall Street titans: its spread to corporate America and state and local governments. Companies from Goodyear Tire & Rubber (GT) and Duke Energy (DUK) to Gannett (GCI) and Caterpillar (CAT) are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle. California Governor Arnold Schwarzenegger says his and other states may need emergency federal loans as funding dries up. A cash crunch on Main Street would endanger companies' basic functions -- paying suppliers, making payrolls and rolling over debt. The widening of the crisis suggests that Bernanke and Treasury Secretary Henry Paulson may have further fires to put out even as the Treasury sets up the $700 bln financial-industry rescue plan approved last week.

Facing shortfall, Massachusetts inquires about a Federal loan - NY Times
NY Times reports the Massachusetts state treasurer has asked the federal government about lending the state money under the same favorable terms given to banks and investment firms during the financial crisis. Treasurer Timothy Cahill's requests last week to the Treasury Department and the Federal Reserve Bank of Boston were prompted by the state's inability to borrow from the short-term debt markets, The Boston Globe reported on Saturday. The financial turmoil has caused credit markets to stop lending, or to charge prohibitive rates. Massachusetts has enough money to cover its expenses for the coming weeks, Mr. Cahill said, but a low-rate loan would ease a cash shortfall if the credit problems persist.
RCM Comment: We highlighted in last week's blogs the potential issues developing in the Muni. markets. Based on the above two stories those issues are clearly heating up. Holding a portfolio of Muni. bonds with one's "safe money" could actually be very dangerous; just as holding the wrong money market funds have proven to be disastrous. I write these words not to scare but to instead wake up you, the reader, to the true reality of the situation. You won't get this commentary on CNBC or in the newspapers for the obvious reasons. Their business models are based on constant cheerleading. However, now is a time to protect assets and we remain committed to being your 'lighthouse in the storm'. The best assets to hold in this environment are GOLD and short-term US treasuries.

GS Goldman Sachs execs can't sell shares - NY Post (128.00 )
NY Post reports the co's top four executives agreed to hold on to 90% of the stock they own in the co as part of Goldman's agreement to raise money from Warren Buffett's Berkshire Hathaway. Chief Executive Officer Lloyd Blankfein, Chief Financial Officer David Viniar and Co-Presidents Gary Cohn and Jon Winkelried are named in the "material definitive agreement" disclosed by Goldman in a regulatory filing. The accord prevents the executives, their families and their estates from selling more than 10 percent of the common stock they own until Oct. 1, 2011, or until Berkshire redeems its $5 billion in preferred stock, whichever comes soonest.

China will test short selling, margin lending - WSJ
WSJ reports China's securities regulator said Sunday it would shortly begin a trial program allowing securities firms to engage in margin lending and short selling, long considered necessary to help the country's stock market mature beyond its repeated boom-bust cycles. The China Securities Regulatory Commission said in a statement on its Web site that the program would be started, but it didn't give a timeline. It said the brokerages allowed to participate in the program would be decided based on their net capital size and risk capabilities, among other criteria. The trial would be expanded at some point, it said. It is unclear why Chinese regulators are acting now, but the move suggests that the world's credit crisis hasn't derailed some of their basic plans to reform. The decision also suggests Beijing's policy makers believe a recent effort to boost the market put a floor under the prices of key stocks and lessened the risk that short-sellers might weigh heavily on prices. The government last month pledged that state agencies would buy stock in major listed banks and companies.
RCM Comment: What kind of a world are we living in where China's markets are becoming less regulated than ours?

Fed says to begin paying interest on banks' required excess reserve balances
The Federal Reserve Board on Monday announced that it will begin to pay interest on depository institutions' required and excess reserve balances. The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee. Consistent with this increased scope, the Federal Reserve also announced today additional actions to strengthen its support of term lending markets. Specifically, the Federal Reserve is substantially increasing the size of the Term Auction Facility (TAF) auctions, beginning with today's auction of 84-day funds. These auctions allow depository institutions to borrow from the Federal Reserve for a fixed term against the same collateral that is accepted at the discount window; the rate is established in the auction, subject to a minimum set by the Federal Reserve. In addition, the Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets. Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit. The Federal Reserve stands ready to take additional measures as necessary to foster liquid money market conditions.
RCM Comment: Another example of increasing the money supply. Ben Bernanke has graduated from "Helicopter Ben" to "B-52 Ben" as he continues to throw money at the problem.

Iceland in emergency talks to prevent bank meltdown - FT
FT reports Iceland's prime minister and central bankers were holding emergency talks with pension funds and banks yesterday as the country looked overseas for funding to shore up its crisis-ridden financial system. Pension funds were being urged to repatriate foreign assets, while the Central Bank was looking to bolster its foreign exchange reserves. The government may this morning announce plans for several billion euros to be injected into the Central Bank, people with knowledge of the talks said, although others warned there was no certainty that a deal would be reached or that it would be sufficient to reassure nervous markets. Geir Haarde, prime minister, yesterday met banking executives, including Hreidar Mar Sigurdsson, chief executive of Kaupthing, the country's biggest bank, to discuss measures to ease the crisis, which has seen the Icelandic krona depreciate significantly and led to the quasi-nationalization of Glitnir, the country's third largest bank. "We are in the middle of important discussions," said Trygvvi Palsson, director of financial stability at the Central Bank, who declined to comment further. Trygvvi Herbertsson, special economics adviser to the prime minister, said it was too early to speculate on the outcome. Bankers in Reykjavik want any additional funds made available to the Central Bank to passed on to them to substitute the drying up of wholesale funding, which has caused liquidity problems for banks around the world.

Italy to propose European bailout fund - News.com.au
News.com.au reports Italy will resurrect the idea of creating a European bank bailout fund at a meeting of EU finance ministers in Luxembourg, Prime Minister Silvio Berlusconi said. While the idea of creating a European fund to match the $700 bln rescue package approved by the U.S. failed to gain traction at a weekend mini-summit of European leaders in Paris, Mr Berlusconi said minds had changed. On Saturday, German Chancellor "Angela Merkel couldn't accept'' the proposal "because she didn't have the power". Today, on the contrary, she said she agreed. France will do the same,'' Mr Berlusconi was quoted as saying by the ANSA news agency overnight. Germany had before the summit made clear its opposition to the idea of creating a 300 bln bln ($536 bln) European fund, preferring for countries to act on their own to save failing banks on a ad-hoc basis. However, Germany was also forced to reverse its opposition to guaranteeing bank deposits, over the weekend providing a blanket guarantee to all checking and savings accounts. Mr Berlusconi said that Italian Economy Minister Giulio Tremonti would make the proposal for the fund, worth about 3% of GDP, at tomorrow's meeting in Luxembourg of EU finance ministers.