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To: GST who wrote (114434)	1/5/2001 9:58:30 AM
From: H James Morris	Read Replies (1) \| Respond to of 164684

Gst, short bank stocks!The bigger the bank the better. In another month the sluts will go next. I started today with puts on Morgan Stanley! >LONDON, Jan 5 (Reuters) - A second unexpected rate cut by the U.S. Federal Reserve in as many days was welcomed by European analysts and investors on Friday, but some cautioned the move could indicate distress in the banking system. The Federal Reserve on Thursday cut the usually symbolic discount borrowing rate, adding to Wednesday's shock move to cut U.S. interest rates that was designed to prop up the flagging economy. The central bank cut the discount rate, which it charges on Fed loans to commercial banks, by a quarter percentage point to 5.5 percent, matching an identical move taken by Chairman Alan Greenspan on Wednesday along with a half point reduction in the federal funds rate, an overnight lending rate. While analysts said the discount move was the result of a technical hurdle to Greenspan cutting the rate by a half point without the cooperation of regional Fed members, it also underscored growing concern about credit woes among major U.S. lenders. "The discount rate is technical but it may suggest that there is some financial distress," said Bill O'Neill global strategist at HSBC Investment Bank in London. "There has been talk that (the Fed) know of a particular bank in distress." "Banks don't often do it because they can borrow elsewhere more cheaply," said Paul Horne of Schroder Salomon Smith Barney in London. "If they use it it is a signal to the Fed that banks are having difficulty and may be having trouble on the open market." "There has been concern because the Fed has acted so precipitously and indeed without precedent. It will get the market worried that there is some kind of specific problem out there that the market doesn't know about." To be sure, there was little sign in European trading that bank credit was seen as vulnerable, with corporate spreads in the sector tightening slightly against government debt and as European banking shares outperformed the general market. As well, the most recent money supply figures from the Fed indicated a drop in borrowing at the discount window in the week ended January 3. The discount rate is the rate at which banks can borrow from the Federal Reserve system. U.S. CREDIT WOES But U.S. banks face a raft of potential credit problems, including over-burdened telecoms firms, struggling companies such as Xerox (NYSE:XRX) and a profitability and credit crisis among formerly solid-gold electric utilities in California. A huge gap between the cost of providing power and what utilities in California are allowed to charge clients has cost utilities Pacific Gas and Electric Co. (NYSE:PCG) and Southern California Edison (SCE) (NYSE:EIX) billions and pushed their credit ratings to levels usually seen only in the most speculative companies. Ratings agency Fitch on Thursday pushed their debt "deeply" into junk bond status and warned in a statement that, "Default is a real possibility for these utilities and their parent companies." Standard and Poor's downgraded both utilities to the cusp of junk status, making it much more difficult for the utilities to raise the capital they need to remain solvent. Large companies typically fund themselves in the commercial paper market, but if forced will draw down on large backstop loans from commercial banks. Banks such as Bank of America (NYSE:BAC), J.P. Morgan Chase (NYSE:JPM) and other large U.S. banks have already warned fourth-quarter profits will fall short of expectations, placing the blame on problem loans, increased loan loss reserves and dwindling fees from trading. Most U.S. banks have had to set aside chests of money to protect against commercial loan defaults, analysts said. Bank of America, based in Charlotte, N.C., already warned Wall Street last month it would miss fourth-quarter earnings forecasts partly because of some $1.2 billion in bad loans and lacklustre trading and investment banking fees. "The Fed is the borrower of last resort and it could well be the case that they are trying to improve liquidity conditions for U.S. banks," said Matt Wickens, global economist at ABN Amro in London. In a statement, the Fed said its board of governors had voted on the cut unanimously at the request of all 12 regional Fed banks. The central bank -- which moves the discount rate only at the request of regional Fed banks -- had said on Wednesday it was prepared to take this additional action if the regional banks requested it do so. In a statement issued that day, when the Fed cut its fed funds rate half a point to 6 percent and lowered the discount rate to 5.75 percent, the central bank had said it stood "ready to approve a further reduction of 25 basis points in the discount rate to 5.5 percent" if regional Fed banks asked for such a move. Changes in the discount rate are decided by the board of governors, while moves in the fed funds rate are voted on by the FOMC, which usually meets eight times a year.