Did you see that strange auction conducted by the US Federal Reserve? The Fed conducted the first of four blind auctions designed to encourage institutional borrowers to get over it already and come begging for money from the Central Bank. All you had to do is show up in a pair of sunglasses, bid for your money, and take it with you in a brown paper bag.
Technically, the Fed auctioned off US$20 billion in loans. Bidders were invited to submit a bid and an interest rate they would prefer to pay. It was the first of four such auctions designed to alleviate the stigma of borrowing directly from the Fed. By the looks of things, there will be more auctions, indicating the general bear market in shame in Western Civilization.
Ninety-three different banks submitted bids totalling US$61 billion—more than the Fed had up for sale. The average interest rate on the funds loaned was 4.65%, slightly less than what the banks would pay to borrow under normal circumstances from the Fed’s discount window (where the rate is currently 4.75%).
How can the Fed be sure that perfectly solvent institutions aren’t borrowing money at below-market rates and then lending it out at higher rates, turning a 28-day profit? After all, that’s what all of Wall Street has been doing for the last six years, borrowing short and lending long. Well, maybe the Fed isn’t sure, but needs to do something anyway, or look like it’s doing something.
Either way, don’t expect the credit crisis to go away just because the calendar rolls over. Wall Street’s accumulation of massive debts has real consequences. One financial firm after another—Citi, UBS, Morgan Stanley—is being forced to sell itself (at junk bond rates of interest) to Sovereign Wealth Funds with capital.
Junk banks. Junk brokerages. Junk investment bankers. Call it what you will. But Wall Street has mis-managed its way into a situation where it must share ownership with foreign governments. Is this a bad thing? A good thing? Or are the real suckers the sovereign wealth funds, who have traded US dollar reserves for shares in an asset class headed for a long-term bear market?
More on that next week, where the light market schedule will give us more time to tackle important but not urgent topics like that. In the meantime, have a great weekend.
Markets and Money