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To: NucTrader who wrote (361822)	3/12/2008 4:12:27 PM
From: Giordano Bruno	Respond to of 436258

Tradition. -g-

To: NucTrader who wrote (361822)	3/12/2008 4:30:33 PM
From: stan_hughes	Respond to of 436258

Here, read this, it's better than any explanation of the mechanics involved at the moment than I could write myself: Bandaid on a Ruptured Jugular Tuesday, March 11th, 2008 at 9:02 AM by Lee Adler Let's talk about the Fed's expansion of its securities lending program that the market is so excited about this morning. It seems to me that the market does not understand the implications of this action. We'll take this one step at a time. What is the purpose of borrowing securities from your broker? It's the same for Primary Dealers borrowing Treasuries from the Fed. Why do PDs borrow securities from the Fed? To sell them short. The Primary Dealers are heavily short Treasuries at all times. They are heavily long all other debt securities simultaneously.The level of securities lending in recent months is unprecedented in all of human history, by an order of magnitude of 10. Why is that? Because they were heavily short Treasuries and are being subject to the greatest Treasury short squeeze in history. Their only out was to borrow more securities from the Fed and short more into the market as the public clamor and panic for "safe" Treasury securities rose to a mad crescendo. The Fed is now responding to the pressure of the imminent collapse of the Primary Dealers and major banks worldwide, because not only are the PDs heavily short the stuff that is going up, Treasuries, they are heavily long the stuff that is going down, which is all other debt securities. This is the worst of all possible worlds and the Fed's action is like putting a bandaid on a ruptured jugular vein. So do you get it? If you're a PD, normally you short (borrow) money at treasury rates and you long (buy) everything else, because everything else in theory should be paying a bigger coupon and you get to keep the spread. The only other thing that I would add to Lee's missive there in the context of answering your question is that investors in search of perceived safety are still causing problems for the PDs in buying treasuries here. Eventually these technical pressures will subside unto a new equilibrium, to (perhaps) even reverse in the future should the credit worthiness of the US come to be doubted -- in which case US treasuries will start getting dumped like last week's leftover mushroom soup, and almighty hell will break loose