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To: Joan Osland Graffius who wrote (52130)	9/1/2002 12:54:34 AM
From: stomper	Read Replies (1) \| Respond to of 209892

Hi Joan. Soooo, what is your interpretation of borrowing from the Fed banks rivaling that of post 9/11? Is someone large going down? I read some anecdotal articles about one multi-billion dollar AUS fund in deep trouble/liquidated (along with several others in trouble). But that is a bizarre anomaly on the most recent borrowing chart, considering we've had no harsh financial or "event" news. -dave

To: Joan Osland Graffius who wrote (52130)	9/1/2002 2:14:00 AM
From: UnBelievable	Read Replies (1) \| Respond to of 209892

I'm Going To Look Into It A Bit More While it clearly is a significant increase in the amount of borrowing, the amount involved is not that much (An increase from an average of $.2 to $1 Billion), particularly in the context of the liquidity injections we have been seeing from the FOMC in the form of RPO's. Between August 22 and August 28 the FOMC appeared to be making an effort to reduce the amount of liquidity being made available through daily open market operations. While in the two months prior to that time the total RPO's outstanding was averaging about $20 Billion during that week it decreased to $12 Billion on August 23 through August 26. Starting on the next day the amount outstanding was increased on a daily basis reaching $23 Billion on Friday. My sense is that the borrowing depicted in the report are not, in fact, on the part of the large money center banks (most of whom are primary dealers in Federal Securities and meet their liquidity needs, to the extent they can, through RPO's) but rather from the other "normal" banks. Usually these banks meet their nightly reserve requirements by borrowing from the money center banks. The interest on these loans, while in general consistent with the Federal Funds rate, is not set by the Fed, but rather determined in the marketplace based on supply and demand. One of the major considerations in their determination of the daily RPO activity is the market determined Federal Funds rate compared to the Feds Target rate, currently 1 3/4%. I did note on Friday morning that the Fed Funds were trading well above that target. As an alternative to borrowing from other banks to meet their reserve requirements commercial banks have the option of borrowing directly from the Fed. The Fed discourages this type of borrowing though. One of the ways in which they do so is by charging a higher rate of interest than the Federal Funds target rate. The increase in the amount of direct borrowing from the Fed may be related to the increase in the actual Fed Funds rate, presumably resulting from the Feds decrease in liquidity through RPO's. While the significant problems in our economy are clearly evidenced by its lack of response to the Fed's outrageous increase in the monetary base (look at the growth of MZM in the same Fed publication), I can’t say for sure, at this point, that the spike in direct Fed borrowing is indicative of some unpublicized economic crisis. What we can be sure of though is that the Fed in now in the end game of its attempt to maintain the value of the dollar and support the stock market. It was the serious break in the value of the dollar that prompted the Fed’s attempt to wean the market of massive daily liquidity infusions (bolstered perhaps by the hope that the rally of the last six weeks was in fact substantive and not just the product of their intervention). When the markets broke below support last week made it clear that without greater intervention it was headed back down, and with the dollar appearing to find some support, the spigot was opened up again. Of course unless the spigot is closed, the dollar will resume its descent. If it is closed, the market will resume its descent. I would imagine that it was the financial communities increased awareness of this fact, essentially that the Fed cannot do anything at this time to fix the economy, which prompted Mr. Greenspan’s statements Friday that there was nothing that the Fed (i.e. he) could have done to have prevented the formation of the bubble, the bursting of which is being blamed for the current situation. It is not clear if his representations to that effect are born of ignorance or vainglory. Not that it really matters.