10/15T11:51 News & Notes

RCM Comment: The canaries continue to die as the coal mine remains toxic even after the central bank interventions of the weekend. Evidence below:

Fannie, Freddie, FHLB debt risk premiums at record wide levels
The government backs Fannie and Freddie, but debt risk increases?!?!?! The market is suggesting that FNM and FRE could still fail.

Liquidity troubles, volatility bedevil currency markets - WSJ
WSJ reports days after governments in the U.S. and Europe announced historic steps to shore up their banking systems, currency markets have remained volatile and sparsely traded compared with just months ago. This environment makes it difficult for companies to manage their exposure to currencies, and, in some cases, has resulted in major losses. Liquidity in currency markets is "the worst I've ever seen it," said Parker King, head of currency investing at Putnam Investments. "The volatility has gone through the roof." While conditions are slightly better than during the depths of last week's turmoil, they are unlikely to improve quickly, said investors. In a barometer of the broader fear pervading markets, interest rates for short-term borrowing between banks have yet to drop significantly. The average daily turnover in currency markets in April 2007 was $3.2 trillion, according to the Bank for International Settlements. No more-recent figure is available, but investors said they are trading a fraction of what they normally would, with greater difficulty and at much higher costs. Transactions that would have had no impact on exchange rates several months ago now move the market.

Problem of home prices remains - WSJ
WSJ reports the Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices. The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures. At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein.

RSX Russian stocks suspend trading as shares fall - Intl Herald Tribune (19.44 )
Intl Herald Tribune reports Russia's two main stock exchanges suspended trading as shares fell steeply in the morning, with energy stocks tracking oil prices lower. Trading was suspended at 1:05 p.m. (0905 GMT) for one hour on the RTS after shares fell 6.9%. MICEX, where most trading takes place, suspended trading at 1:35 p.m. (0935 GMT) for one hour after stocks dropped 6.9%. Shares were hurt as oil prices — the backbone of Russia's economy — dropped to $77.8 a barrel and as Asian indexes moved lower Wednesday. European stocks also declined in morning trading.

Oppenheimer discuses U.S. government's decision to inject $250 bln into financial institutions
Oppenheimer notes on Tuesday, the Treasury announced plans to make $250 bln in capital injections directly into U.S. banks. While a formal term-sheet was provided for the terms and conditions of such capital injections, co names were not officially provided. The terms are relatively painless for the participating banks and resemble something like bridge-equity in the sense that the terms encourage the replacement of such capital at the earliest date possible with benefits of a 50% reduction in warrants. Cos could of course choose to take advantage of the low-cost capital as well. Firm does not view this as an "out of the woods" move but rather one large step in the right direction to restore some liquidity to a badly beaten down financial markets. Firm believes credit costs will continue to surprise on the upside and revs will begin to surprise on the downside as cos will be forced make money off of lower asset bases. Firm believes at least a meaningful portion of this infused capital will be directed toward building reserves rather than asset growth.

Fed offers GE, Citigroup commercial paper subsidies - Bloomberg.com
Bloomberg.com reports the Federal Reserve may subsidize America's companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market. Fed officials yesterday set the yield they will pay for commercial paper at about 1.6 percentage points less than the average cost for financial companies, weekly central bank data show. Policy makers last week announced emergency plans to buy the securities after the market shrank to a three-year low. The discount cuts the cost of cash to 2.2% from 3.7% for General Electric (GE) and from 4.7% for Citigroup (C), data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out. "The Fed can drive everybody else out of the market'' for buying commercial paper unless market yields drop, said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors, who used to work at the Atlanta Fed. That could end up "assuring that markets won't restart,'' he said.

ECB Leads push to flood banks with dollars in unlimited tenders - Bloomberg.com
Bloomberg.com reports the European Central Bank, Bank of England and Swiss National Bank loaned financial institutions a combined $254 bln in their first tenders of unlimited dollar funds, stepping up efforts to ease strains in markets. The Frankfurt-based ECB lent banks $170.9 bln for seven days at a fixed rate of 2.277%. The Bank of England allotted $76.3 bln and the Swiss central bank $7.1 bln at the same rate, also for a week. Policy makers are trying to unfreeze credit markets and get banks lending to each other again after a crisis of confidence culminated last week in the biggest stock-market sell-off since 1933, threatening to tip the world into a recession. Money-market rates have started to decline, suggesting the measures may be working. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans will drop about 14 basis points to 4.50% today, according to David Buik, a market analyst in London at interdealer broker BGC Partners Inc. Asian money-market rates fell earlier today after the Bank of Japan said it will also offer unlimited dollar funds, with its first tender to be held on Oct. 21, and Hong Kong agreed to guarantee all bank deposits. In the U.S., the government has earmarked $250 bln to purchase stakes in the nation's largest financial companies including Goldman Sachs Group Inc. to prevent a banking collapse. The U.K. is spending 50 bln pounds ($87 bln ) on bank stakes, while France, Germany, Spain, the Netherlands and Austria have pledged 1.3 trillion euros to shore up their banking systems.
RCM Comment: Hard to get our heads around the numbers discussed in this piece, but easy to understand the effects this wild growth of fiat money will have on GOLD.