Money Market Stress
September 18th, 2008 12:36 pm
The money market is in a severe state of disruption in spite of the massive liquidity injection by the central banks of the world. Three month Libor for tomorrow is 3.40 percent bid and as of a few minutes ago there was no offer. Investors are allocating funds to the overnight market and that has prompted a bit of a scramble in the longer maturities such as the three month sector.
There was other troubling news, too. The Federal Reserve in a standard weekly announcement revealed that CP outstanding had declined by$52 billion in the week which ended at the close of business yesterday.
Additionally, the Colorado Diversified Trust with assets of about $200 million was not diversified enough and its exposure to Lehman caused it to break the buck. The fund ministers to local schools and governments in Colorado.
This was another source of tension and intensified the reexamination of portfolio holding by investors.
Finally, in a real world example of the extreme difficulty of funding at a reasonable rate, a AA rated bank paid 4.00 percent for $50 million of two week money. That demonstrates the significant pressure that even the most stellar names are facing.
If this doesn’t break, we will see a deflationary credit collapse. Either no one has the money to lend out or if they do have money, they don't trust the other side of the trade to be there the next morning so they can get repaid.
If the commercial paper market continues to freeze up like this, it also means businesses in every industry are going to seize up. They simply will not be able to do business, fill orders, etc.Other bad news
Washington Mutual auction does not attract any bids-FT
The auction is being conducted by Goldman Sachs (GS), which has approached a number of banks, including Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC), according to people close to the situation. The lack of interest in WaMu means that Goldman may evaluate other options, including raising capital by selling off attractive assets, or attempting to raise fresh capital to allow the bank to stand alone.
Money Market Funds are also freezing up. The only other place to destroy creditworthiness is top-rated commercial paper from non-financial corps and T-bills.
Banks abruptly stopped lending to each other or charged exorbitantly high rates Tuesday, threatening to spread the troubles of American International Group Inc. and Lehman Brothers Holdings Inc. to a broad range of financial institutions and the global economy.
* Net foreign purchases of long-term U.S. securities were negative $25.6 billion. Of this, net purchases by private foreign investors were negative $20.7 billion, and net purchases by foreign official institutions were negative $4.9 billion.
In the face of potentially huge gasoline and diesel shortages, this could create a catastrophic set of events that would shut the entire economy down!