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Wednesday, March 12, 2008

Personal Finance QuickTake: Stock Market Loves the Fed







The Stock Market jumped 416 points today based on the Federal Reserve move to improve liquidity to the market. This is the largest gain for the market since July 2002.

This $200 Billion flu shot, gives liquidity to an area that companies have been to afraid to buy or allow to use as backing for other loans; Mortgage backed securities. This will develop a market for those securities that have seen constant write-down, as even good performing portfolios have been painted with this tainted brush.

This International Fund, backed by the Federal Reserve, European Central Bank, the Bank of Canada and the Swiss National Bank aims to put a floor over the bottomless pit that had drained markets over 500 point in the last 3 days. Based on the large increases today, Wall Street believes that they did just that.

These Central Banks are hoping that these moves prove more effective then rate cuts, which have been only temporary bandages.

From the Yahoo Report:

"It's not just a rate cut. I think it's a very creative way to do financing," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. "It shows the Fed is willing to do things that are a little out-of-the-box to shore up credit issues. I really think they went to the heart of the issue."

The latest step by the central banks was seen as a direct lifeline to investment banks, which previously couldn't borrow beyond already established Fed liquidity plans. The plan basically allows Wall Street's biggest institutions to put up troubled assets as collateral for loans, use the new capital to make money in the market, and then pay back the loan up to 28 days later.

Though eventually banks would be forced to take the troubled mortgage-backed debt back on their books, the plan still takes short-term pressure off them. Many of these banks will release first-quarter earnings reports next week.

Hopefully this puts a stopgap into place so the market can break out of this death cycle. The constant write-down of these debts has put many small and medium banks on the edge of Bankruptcy. As the report states this is only a 28 day cooling off, as this is how long they would have to repay the bridge loans, but it might be the break needed to re-establish liquidity.

One of the issues has been that even though the Fed has cut rates, mortgages and other credit vehicles haven't lowered as much as there just isn't a lot of money available to loan, even for the good customers. This had led to a viscous circle, where you can't even refinance to take advantage of the lower rates so the rates keep going lower to help the economy.

Only time will tell...Funny, that Zombie movie is called "28 Days Later!"

3 Comments:

Fiscal Musings said...

Nice explanation of what the Fed is doing. Hopefully it actually helps for more than just a day or two.

Funny about Money said...

Argh! I sure hope this doesn't just add to the volatility. While the big upward tick is mighty welcome (I lost 14 grand in the market last month, grind teeth wring hands!), wild swings do nothing to calm my nerves. I'm still putting my current savings into the money market...or maybe in a coffee can under the roses.

RacerX said...

@Fiscal - Yeah me too. At least is seems more innovative then a continuous cycle of cuts that aren't working!

@Funny - I hear ya! Unfortunately burying money in our yards is probably the only way we are going to increase our home value! :)

Thanks you both very much for visiting!

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