WALL STREET CITY
WallStreetCity.com
Inside Wall Street Oct 22 1998 3:33PM CST
The Real Story Behind the Fed Ease
By Paul Lam
Senior Markets Writer
Contrary to what most would like to believe, the Federal Reserves
abrupt decision to cut interest rates on Oct.15 was not so much due to
concerns over a slowing economy or credit crunch. The action, which came 16 days after the first 0.25% rate cut, was outside the normal context of a Federal Open Market Committee meeting, which does not convene again until Nov. 17. It was a response to an immediate meltdown threat of the banking system.
According to informed sources, the Fed had been injecting liquidity into major banks even before the Oct. 15 ease. Federal Reserve repo tenders, which are repurchases of Treasury securities held by banks in return for short-term cash, a common way to add liquidity to the banking system, rose by 35% during the two weeks prior to the surprise rate-cut.
The Oct. 15 ease, on top of the recent surge in liquidity available to
banks, reportedly came after urgent requests from the resident of the
Federal Reserve Bank of San Francisco, who told Federal Reserve chairman Alan Greenspan of extraordinary demands by one member bank in its region.
Reliable sources indicate that this demand for repo funds had been
provoked by a credit squeeze in the interbank market against Bank of
America (BAC:NYSE). Bankers believe that the bank's troubles are far
more serious than what is being told to the public. Bank of America made a $357 million loss write-off due to its participation in the troubled hedge fund D.E. Shaw, and bought $20 billion in outstanding securities and derivatives contracts from that hedge fund in order to
prevent its demise. The grave danger on Oct. 15 was of a breakdown in
the interbank payments system, which could have easily led to a global
systemic collapse.
While investors around the world rejoice the Feds action by
outrageously bidding up stock prices, the more alarming message is that the emerging markets crisis has now fully reached the G7 financial systems. |
