LIBOR Rates Plummet on Half Trillion Infusion by ECB

Ok wow. I thought Helicopter Ben was working overtime. I keep pointing out how LIBOR rates (lending rates among banks) remain high despite these infusions, but the Fed auctions are of $20 to $35 billion... now this move by the European Central Bank on the other hand is half a trillion dollars. Quite breathtaking, and the LIBOR rates dropped by half a point. The amount is just staggering. But more along the lines of what is really necessary to get things moving. These $20 billion auctions are useless.

Notice how often we are using the words unprecedented around here? Everything is unprecedented because the problems are so huge, so ingrained, it is taking the magnitude of moves one would never of imagined in the past. As I keep saying, you ain't seen nothing yet in terms of bailouts and helicopter droppings. I expect even more in 2008, but this one (so far) has taken the cake. Massive. Just massive. But again the problem is the banks need all this cash to shore up balance sheets - and they are still not giving it out to their customers. So we are just helping banks save themselves... pathetic really. I am just waiting for the day when instead of saying we will hold this toxic paper for 30 days, just give it to us for 5 years and you have to buy it back from us (central banks) around 2012. That looks like the end game we are going to.

• The cost to borrow in euros plunged after the European Central Bank added an unprecedented $500 billion to the banking system as part of a global effort to ease credit-market gridlock through year-end.
• The two-week euro interbank offered rate dropped a record 50 basis points to 4.45 percent, the European Banking Federation said today. The rate had climbed 83 basis points in the past two weeks as banks anticipated a squeeze on credit through the end of the year.
• ``These are strong-arm tactics intended to show the market they're seriously committed to breaking the deadlock,'' said Marc Ostwald, a fixed-income strategist at Insinger De Beaufort SA in London. ``The ECB is helping to bankroll banks out of a problem that they themselves created.'' (think about that statement for a moment)
• The decline may signal that policy makers, in their first coordinated action since Sept. 11, 2001, are making headway in reviving lending between banks.
• The Bank of England also held the first of two special operations today, offering three-month loans in pounds. Yesterday, the Federal Reserve auctioned one-month cash in dollars, the first of four such operations. (sounds like the CIA, special operations - special times call for special operations)
• The ECB action ``doesn't address the fundamental issues of banks hoarding cash and while the central bank has succeeded in stabilizing the shorter-term rates, it makes little impact on the longer-term rates,'' said Lena Komileva, an economist at Tullett Prebon in London.
• The TED spread, or difference between what the U.S. government and banks pay for three-month loans, narrowed for a fifth day to 188 basis points, indicating an increased willingness among banks to lend. The spread was 35 basis points at the start of the year.
• ``Maybe this is the sign we've all been waiting for that a peak in Libor has been reached,'' said Patrick Jacq, a fixed- income strategist at BNP Paribas SA in Paris. ``It's a definite sign of an improvement in the market.''
• Goldman Sachs Group Inc. estimated last month losses related to record home foreclosures in the U.S. may be as high as $400 billion for financial companies. If accurate, banks, brokerages and hedge funds would need to cut lending by $2 trillion, triggering a ``substantial recession,'' the firm said.
• U.S. corporate defaults probably will quadruple next year after the number of companies that lost their investment-grade credit ratings rose at the fastest pace since 2003, according to Moody's Investors Service.
  

Portfolio.com weighs in with my favorite bearish economist Mr. Roubini

• "The operation is highly unusual and heterodox; and while getting creative in dealing with liquidity crunches may be appropriate, this action signals some desperation on the part of the E.C.B.," says Nouriel Roubini on his blog.
• "And since most financial and other private contracts are indexed to Libor, an average Libor that is about 100 basis points above policy rates, it is equivalent to the E.C.B. having raised its policy rate by 100 basis points in the last few months," Roubini says.
• Others are skeptical of the actions by the central banks. "This is basically Father Christmas to those who have access," Erik Nielsen, an economist at Goldman Sachs, told the Financial Times. "They are bailing out people who have not really adjusted their balance sheets to the new reality."
• Yet American investors have been looking for additional liquidity efforts from the Fed.
• Yves Smith at the Naked Capitalism blog notes: "Markets are right to be concerned about recession risks, but there is an awful lot of whining mixed in here. After all, most traders' year-end bonuses stand to benefit a lot from an even softer Fed policy stance. The markets were not satisfied with one dessert; they wanted two." (and that pretty much sums up the entire game folks - we will over use/abuse the toy, and then we get bonuses, and then when we break the toy with our greed, we expect to get bailed out because we are "too big to fail", and we get bonuses from that too. End of story.)

What I wonder is if/when people start seeing these unprecedented actions as worrisome as opposed to comforting. At what point do people wonder "why exactly" do we need to do such historic actions? What is so screwed up, so deeply flawed that central banks worldwide need to take such action... what is so dark out there? Instead we continue to just clap like seals each time it happens since it will fix everything. Interesting to watch.

Long watching unprecedented times and unprecedented actions play out; short bailing out the system from itself ....