Banks borrow $7.2 billion from Fed

WASHINGTON (MarketWatch) -- In the first significant borrowing from the Fed since it lowered the discount rate last month, U.S. banks borrowed $7.2 billion from the Federal Reserve as of Wednesday, the most since just after the attacks of Sept. 11, 2001, the Fed said Thursday.

The average borrowing for the week was $2.7 billion per day.

The Fed data don't detail the names of the borrowers. The data indicate that $4.9 billion in loans were owed to the Federal Reserve Bank of New York, $1.6 billion to the Cleveland Fed, and $550 million to the Richmond Fed.

Last month, five big banks had borrowed from the discount window in a symbolic show of support for the Fed. The borrowing from the Richmond Fed appears to be a holdover from the symbolic borrowing earlier.

By borrowing from the Fed at 5.75%, the move shows that several U.S. banks could not obtain needed funds from other banks at the federal funds rate, which closed at 5.18% on Wednesday and has averaged 5.01% so far this month.

One analyst said the Fed had forced the banks to borrow the money by deliberately squeezing reserves at the end of the two-week maintenance period, when many banks must borrow funds to prove to the Fed that they are holding adequate reserves against their capital.

"Most of this borrowing was forced," said Lou Crandall, chief economist for Wrightson ICAP. The Fed was "deliberately stingy" ahead of the expiration of the reserve maintenance period on Wednesday, he said.

"It's like a game of musical chairs," Crandall said.

In essence, the Fed forced the banks that were left without enough reserves to borrow at the discount window by temporarily pushing the federal funds rate above the discount rate at the end of the day on Monday, Tuesday and Wednesday, Crandall said. It was cheaper for the banks to borrow from the Fed than to borrow from other banks.

Crandall said that the high for the effective fed funds rate touched 6.5% on Monday, 6% on Tuesday and 6.25% on Wednesday, above the 5.75% discount rate.

Without much success until this week, the Fed had been encouraging banks to use the discount window facility to bring more liquidity into financial markets and to ease the credit crunch.

Forcing the banks to borrow from the discount window could be part of the Fed's effort to get rid of the stigma that's been associated with borrowing from the Fed. By making banks more comfortable with discount-window borrowing, the Fed hopes its plan could still work.

"If the carrot won't work, use the stick," Crandall said.

Borrowing from the discount window has been rare except during extraordinary times. Such loans from the Fed typically carry a stigma because market participants assume that only a desperate situation would compel a bank to use the lender of last resort.

Last month, however, the Fed lowered the discount-rate penalty from one percentage point to a half point, and encouraged banks to borrow as needed to help flood the system with short-term cash. Until this week, there was no evidence of any significant borrowing from the Fed.

This week's borrowing could be related to the seizure in the commercial paper market, said Mike Englund, chief economist for Action Economics. Corporations that cannot roll over their own paper are turning to banks for short-term funds.

Englund speculated that the banks that borrowed from the Fed this past week could be using the Fed as the source of funds for these backstop loans. Under new rules adopted a month ago, the Fed is allowing banks to borrow at the discount window for 30 days at a 5.75% fixed rate.

There was some evidence Thursday that the credit crunch is easing, at least in the very short-term commercial paper market, where corporate securities average 45 days' maturity. The Fed said outstanding paper fell for a fifth straight week, but at a much slower pace than seen earlier. Commercial paper levels are down $306 billion or 13.8% to $1.92 trillion in the past six weeks

Pound reaches 14-month euro low

he pound has briefly fallen to a 14-month low against the euro on fresh doubts over the UK economy's resilience in the face of a global credit squeeze.

At one point, the pound was trading at 68.58p to the euro, after the Bank of England offered emergency help to UK mortgage lender Northern Rock.

The move has led to fears that other banks could have to seek similar aid.

To ease panic in the financial system, the Bank of England could delay raising rates, further hitting the pound.

The pound rose slightly in later trading to 68.99 pence, while the euro hovered just below record highs against the dollar set on Thursday.

The euro has gained momentum as currency investors bet that the European Central Bank will raise its key interest rate of 4% by December this year.

The move is expected as the central bank has made it clear that keeping inflation under control is a priority as the bloc's economy continues to expand at a steady pace.

Market suspicion

In contrast, analysts have abandoned expectations of another interest rate rise in the UK, while the money markets continue to dry up and house prices look to have peaked.

A survey from the Royal Insititute of Chartered Surveyors earlier in the week showed house prices fell in August for the first time in two years.

Northern Rock was the biggest mortgage lender in the UK in the first half of the year.

So its problems accessing funds in the normal way through borrowing from banks and other financial institutions has deepened fears that the British economy will suffer as a result of the credit clampdown.

This has prompted many traders to predict that the Bank of England could even start cutting rates from their current level of 5.75% from next year to support growth and renew confidence in the financial system.

A rate cut would see sterling fall further against major currencies, such as the euro and dollar as the currency would become less attractive for income seekers.

"The longer credit market turmoil persists, the more the market will view currencies with housing market excesses with suspicion," said ABN Amro analysts.

"The UK and the pound may be seen as the next cab off the rank."

¿Qué es la Astrología Financiera?

Tradicionalmente, los analistas financieros han utilizado informaciones tales como los informes de ganancias, promedios, o significativos desarrollos técnicos y tecnológicos de las compañías para predecir cuándo podrían ocurrir variaciones significativas en los precios de las acciones.

De allí surgieron los analistas técnicos, el uso de índice, modelos matemáticos, y criterios tales como niveles de apoyo y resistencia, para determinar los cambios en las tendencias de los valores.

Pero estos métodos tradicionales, pese a su sofisticación y la energía gastada en emplearlos, raramente producen una tasa de éxito mayor al 60%. Esto es sólo el 10 % más de lo que la ley de las probabilidades dictaría normalmente.

Por eso, muchos han llegado a pensar que los métodos lógicos y lineales podrían ser inadecuados cuándo se trata de temas tan ilógico como los mercados financieros.
Con demasiada frecuencia, el mercado desafía las opiniones de los expertos, haciendo quedar a los analistas boquiabiertos por sus fallidas proyecciones.