Fed Adds 84 Day TAF Loan and Extends Emergency Status until 30 January 2009

While the good times are rolling in the equity markets and the insiders are racking up those end of month bonuses, the Fed is quietly breaking out the emergency equipment and getting ready for more bail outs.

If there is nothing else we learn from this, it is that the banks must be restrained from speculation and regulated by incorruptible rules, for the good of the country.

Unless we put strong reforms in place we have done nothing to correct our problem.

Fed to Conduct Liquidity Operations Through January 2009, Introduces 84-Day TAF
07/30/08 08:58 am (EST)
By Erik Kevin Franco

(CEP News) - In addition to the $75 billion 28-day Term Auction Facility (TAF), the Fed will also be conducting a $25 billion 84-day TAF to address the ongoing "fragility" of the financial system.

The Fed also said it would be extending its extraordinary lending to late January 2009.

"In light of continued fragile circumstances in financial markets, the Board has extended the PDCF through January 30, 2009, and the Board and the Federal Open Market Committee (FOMC) have extended the TSLF through that same date," according to a statement from the Fed on Wednesday. "These facilities would be withdrawn should the Board determine that conditions in financial markets are no longer unusual and exigent."

Starting Aug. 11, the Fed will conduct bi-weekly TAF auctions alternating between 28-day and 84-day loans. The Fed currently holds a 28-day TAF every two weeks.

Dealers will also be allowed to access up to $50 billion in treasuries at the Term Securities Lending Facility (TSLF).

The Fed also announced that it was stepping up its international co-operation with the European Central Bank and Swiss National Bank. It will increase its swap line with the ECB to $55 billion from $50 billion while the SNB's line remains at $12 billion.

Both central banks will follow the Fed's TAF auction and offer U.S. dollar loans on their end.

The ECB said the move "is intended to continue the provision of USD liquidity for as long as the Governing Council considers it to be needed in view of the prevailing market conditions."

Corporate Bond Market Says A Tsunami of Debt Default is Coming

Wall Street is throwing an equity party and painting the tape for the end of month bonus calculations.

But the corporate bond markets are signalling serious economic trouble dead ahead, NOT behind us.

Brace for disillusion.


Crumbling bond market sounds distress alarm
Tue Jul 29, 2008 7:25am EDT
By Walden Siew and Dena Aubin

NEW YORK (Reuters) - Corporate bond investors are bracing for growing defaults and record company bankruptcies starting in 2009 as the volume of distressed debt climbs past $184 billion, an all-time high.

More corporate debt is now trading at distressed levels than in 2002, when there was $165 billion of distressed corporate debt following the last bankruptcy boom, according to Moody's Investors Service data.

Nearly one in three junk bonds trade at levels known as "distressed," suggesting a serious risk of default. Even higher-rated corporate bonds have sunk to distressed levels in near-record volumes.

Automakers General Motors Corp and Ford Motor Co lost their investment grade status in 2005 and their bonds have since plummeted to distressed credit levels.

Now bonds of financial firms such as CIT Group Inc, National City Corp, and bond insurers like MBIA Inc are trading as though investors expect them to follow that ignominious path.

"It's the fast deterioration of some of the higher-rated credits that is most alarming," said Jason Brady, a managing director at Thornburg Investment Management. "From a dollar standpoint, we're going to see a record wave of defaults and bankruptcies."

Spokespersons at CIT and National City didn't immediately return phone calls seeking comment about how their debt is trading. MBIA's spokeswoman cited the company's policy of not commenting on its bond market performance.

The total amount of high-yield debt trading at distressed levels is now $147 billion, while investment-grade distressed debt is about $37 billion, according to Moody's credit strategy group.

"The market is pricing in pretty ugly bankruptcy scenarios," said Brady from his Santa Fe, New Mexico, office, where the firm oversees $4 billion in fixed-income assets. "The dramatic bank deterioration is coinciding with the overall level of distress."

A slumping economy, high oil prices and tighter credit conditions are putting a greater squeeze on corporations and impacting their ability to manage and pay off their debt.

Credit crisis fears, especially in the financial sector, have pushed yields on several companies into distressed territory recently, though rating agencies still assign them low default risk.

High-grade companies trading at distressed levels in recent days include Washington Mutual Inc, CIT and Ambac Financial Group, according to MarketAxess.

Ambac's spokeswoman declined to comment, while Washington Mutual didn't immediately return a call.

In all, about 7.5 percent of high-yield and investment-grade debt combined is distressed, the same level seen during the credit downturn of 2000 to 2002, when bankruptcies soared, according to data from research firm Leverage World.

Public company bankruptcy filings climbed to 179 in 2000 and rose to a record 263 in 2001, according to bankruptcy court records.

"Investment-grade bond distress is a new feature of this cycle," according to analyst Christopher Garman, adding, "The largest corporate bankruptcies on record often follow this level of distress."

Some 27.2 percent of high-yield bonds by par value are distressed, or trade at yields of at least 1,000 basis points more than U.S. Treasuries, Garman wrote for Leverage World in a report titled "MegaDefault."

The 7.5 percent distress level points to nearly $97 billion of defaults through 2009, said Garman, a former head of high-yield strategy at Merrill Lynch.

For investment-grade bonds, the distressed level has climbed to 1.8 percent, shy of an all-time high of 2.4 percent. If all the high-grade distressed debt were downgraded, it would increase the volume of high-yield debt by 6 percent.

Both Standard & Poor's and Moody's Investors Service have noticed a sharp increase in junk bonds and credit default swap contracts trading at distressed levels as well.

The overall number of U.S. high-yield bonds trading at distressed levels has soared to about 27 percent, versus 17 percent in April and just 2 percent last year, according to Moody's research group.

More than 20 junk-rated borrowers have credit default swaps trading wider than 1,000 basis points, which implies a 58 percent chance of default over the next five years, according to Credit Derivatives Research.

Much of the distressed debt is in the auto sector, but high-yield opportunities may be growing in the financial sector, said Joe Robison, director of credit research at Allegiant Asset Management.

"As autos go, so does the high-yield market these days," Robison said. "Our area of emphasis is watching the financial companies. We're definitely going to see some financial names go from investment-grade to junk over the next years, and that's where we see opportunities."

There is No Doubt the US is in a Recession - SP 500 Operating Earnings

With the end of month rally in stocks, to provide fatter bonuses for fund managers, the happy-talk is flowing hot and heavy on the financial networks and the internet chatboards.

However, based on the facts there should be little doubt that the US is in an economic recession.

The only question is 'depth and duration?'

Expect the next phase to be the 'bottom-callers' predicting that stocks are starting to rally in expectation that the economy will recover in January 2009, roughly about six months out.

US Lawmakers Pressure FASB to Slow Down Disclosure Reforms

Yet another good reason to sweep the Congress clean in the fall elections.

FASB may delay off-balance sheet accounting change
By Emily Chasan

NEW YORK, July 28 (Reuters) - The Financial Accounting Standards Board, under pressure from lawmakers, will reconsider its timeline for a controversial rule change that may force banks to bring trillions of dollars in off-balance sheet assets onto their books at its Wednesday meeting.

FASB, which sets U.S. accounting rules, will reconsider the rule's effective date and transition provisions, according to a schedule posted on its website.

"Additionally, the Board will consider transitional disclosures and the timing of both projects," FASB said on its website.

FASB voted in April to revamp two accounting standards known as FAS 140 and FIN 46R, to eliminate a concept known as the "qualifying special-purpose entity," or QSPE, that banks use to keep assets like mortgage-backed securities and special investment vehicles off their balance sheets.

The board is expected to release its proposal by the end of August and leave it open for public comment for 60 days. It has suggested parts of the new rule could be applied as soon as next year for companies with fiscal years beginning after Nov. 15.

Troubles in those off-balance sheet assets have been blamed for helping trigger the credit crisis. FASB members have said they believe the current rules prevented investors from understanding the true risks banks faced. Analysts have estimated the rule change could force banks to bring $5 trillion in assets onto their books.

But concerns about the rule's effect on the capital requirements at financial institutions have triggered a firestorm on Wall Street and been partially blamed for the sharp decline in shares of mortgage lenders Fannie Mae and Freddie Mac over the past month.

Some have urged FASB to slow down the rule.

"Changes to securitization accounting could have a dramatic impact on the economy, the capital markets and consumers seeking credit," Republican Rep. Spencer Bachus of Alabama said in a letter to the chairmen of FASB and the U.S. Securities and Exchange Commission last week.

Industry groups such as the American Securitization Forum and the Securities Industry and Financial Markets Association have also written FASB to say "the risks of too much haste are high."

FASB spokesman Neal McGarity has said that other regulators, not FASB, are responsible for setting capital ratios for financial institutions. He was not immediately available for comment on the board's plans. (Editing by Leslie Gevirtz)