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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (63)	9/9/1998 1:48:00 PM
From: Worswick	Read Replies (1) \| Respond to of 2794

Good. Good for you Henry. Did you notice the short term paper rate today for Mexico? Up 1,000 basis points in one day. Ugh. I sent off an enquirry to Moody's... apprising them of my worries. I am certain I will get an informed, prompt and detailed reply to my concerns. I am getting that sinking feeling that I am Chicken Little or maybe I have just wandered off the Texas landscape into the Alamo... just to ask for directions and a drink of water. Is it possible that Fuji Bank has such an exposure to derivatives? That this isn't a typo? 418 trillion yen???? My best to you, Clark

To: Henry Volquardsen who wrote (63)	9/10/1998 9:45:00 AM
From: Peter Singleton	Read Replies (1) \| Respond to of 2794

Henry, did you see this from Morgan Stanley's website (great site, btw) ... ms.com key quote: "There could be information that the BoJ has which (1) has not been released to the public, and (2) might have triggered the action of the Policy Board. It is fruitless to speculate on what this information might be. However, the suddenness of the action and the immediate reaction of market participants who thought that financial instability fears might have been the reason both support the view that this action will likely be interpreted as taking the lead ahead of some other announcement." Japan: Surprise Rate Cut: Does the BoJ Know Something? Robert Alan Feldman (Tokyo) The Bank of Japan has just released a memo with its explanation of the sudden rate cut. First, the BoJ noted that the new call target would be 0.25%, but added that this target would be ignored if financial system stability required extra credit supply. In this sense, the call target is less of a target than a hope. Effectively, the only floor on the call rate now is zero. Second, on reasons for the move, the BoJ cited the economy (indicators are worsening), increased risk premiums for borrowers, and recent weak equity prices. It added that the BoJ's job was to achieve price stability, including prevention of a deflationary spiral. Moreover, it added a separate category of supporting the financial markets with large fund supply if needed. Finally, the BoJ said that there was "not a moment to lose" in taking policy action for economy recovery and financial system reconstruction. Note that the exchange rate was not mentioned. My sense of this memo is that the BoJ is giving a great deal of weight to the financial system in its decision. The logic in the statement is at odds with many statements from BoJ officials, who have said that further interest rate cuts would not help the Japanese economy very much if at all. Moreover, to cite weak equity prices today -- after the Nikkei Dow has recovered to the high 14,000 range -- is not a convincing reason to cut rates. Moreover, the statement that part of the reason for the cut was the expansion of borrowing spreads seems odd. A rate cut will not necessarily reduce those spreads. If interpreted as a desperate move by the BoJ, the spreads might actually widen. These changes of view on the economy and problems in the justification for the cut suggest that financial system stability is the chief reason for the change of policy. There could be information that the BoJ has which (1) has not been released to the public, and (2) might have triggered the action of the Policy Board. It is fruitless to speculate on what this information might be. However, the suddenness of the action and the immediate reaction of market participants who thought that financial instability fears might have been the reason both support the view that this action will likely be interpreted as taking the lead ahead of some other announcement. If this interpretation of the BoJ action is shared by investors, only a limited rebound of the equity market is likely. The bond market is likely to rally further, since JGBs are now being priced to a significant extent from short-term rates.