A third panicked week in the credit markets
There is no exaggerating the carnage and panic in the credit markets these past three weeks.
Friday morning (minutes before the February employment numbers (63,000 jobs lost) hit the wire, persuasively arguing that the US is in recession) the Federal Reserve offered to lend another $200 billion to US banks under very favorable terms, including anonymity, and (again) expanded the list of acceptable collateral in such loans to include more of the wounded bond classes that have been more or less illiquid since the blow up in July.
In essence this isn’t far from the price control idea I’ve been hawking here since August. Ie the Fed is willing to recognize near-face value (ie $1.00) on the wounded bonds, while the market, when a buyer shows up, is trading them (according to several spot reports this week) between 70 and 80 cents.
So, rather than have a broad price control declaration that would allow the banks etc to mark these bonds on their books near face value, the Fed is temporarily taking the bonds off the banks’ hands in exchange for cash credits (based on face value). THe common thread is artifice and pretense trumping the faux market value, in an attempt to thaw the credit freeze.
Here’s a slightly different angle on same from Naked Capitalism (great site).
