Lehman’s Second Anniversary! From the beginning – August 10, 2007 is the trigger –
overnight lending markets went wild! See pic below – vertical line is 8/10/07 – note the
increase in ff volatility!
6
5
4
3
2
1
0
1/01/06
5/16/07
effec ti ve fed funds rate
9/27/08
ff target
Interestingly, the Fed was hawkish on inflation with their August 7th Statement – 3 days
before the trigger – click Here (see third paragraph)
Let us zoom in!
5.5
Data Range 7/1/2007 - 12/31/2007
5.0
4.5
4.0
Shaded area 8/10 - 9/18 2007
T he 'bl ank' hi t the fan 8/10
W hat di d the Fed do???
3.5
3.0
7/01
8/20
10/09
FF
11/28
T ARG
Note a few things: 1) reaction of Fed 8/10 – open up that valve – increase reserve
supply, you want liquidity – we got it – DRAW A PIC! ALSO NOTE THE FED
BEHAVIOR RIGHT BEFORE THE SCHEDULED MEETING SEPTEMBER 18, 2007
WHERE THEY CUT TARGET 50 BASIS POINTS TO 4.75%.
Click Here for Fed (8/10/2007) Statement – 3 days after their Hawkish FOMC statement.
Note that they wanted to make sure that they were serving their ‘lending of last resort’
function!
Seven days later, the Fed released another statement, talk about transparency! It was at
this point they lowered the Discount rate 50 basis points so that the spread between the
discount rate and ff target decreased to 50 basis points, from 100 basis points.
2007-08-10
2007-08-13
2007-08-14
2007-08-15
2007-08-16
2007-08-17
2007-08-20
2007-08-21
6.25
6.25
6.25
6.25
6.25
5.75
5.75
5.75
The Fed basically begged banks to use it, especially major banks so that they send a
signal as in “if JP is borrowing off the Fed, then it must be ok.” Click Here for more.
So on August 22, 5 major banks announced that they each borrowed $500 million from
discount window – click Here for more! It didn’t work too well.
September 18, 2007, the Fed lowers target for first time, from 5.25 to 4.75%
The Fed continued to lower target for the Fed funds – 25 basis points 10/30 – 10/31
meeting and then again, another 25 basis point cut at 12/11 meeting – total of 100 basis
points so far, target at 4.25%.
TAF – the Term Auction Facility – trying to get liquidity to places they normally cannot
reach – do the dentist and gum surgery analogy!
Click Here for the press release! (note, this is one day after the 12/11 statement – the Fed
felt it was more calming not to announce all three developments on the same day)
The TAF served two important purposes – one, more than just primary dealers had access
to this funding – consistent with the gum surgery analogy and two, it deals very nicely
with stigma associated with discount window – many bid on funds and if you win the bid,
you get the cash and since many are bidding, there is no stigma!!! Quite nice!
This is from the press release:
“By allowing the Federal Reserve to inject term funds through a broader range of
counterparties and against a broader range of collateral than open market operations,
this facility could help promote the efficient dissemination of liquidity when the
unsecured interbank markets are under stress.”
On Jan 11, Bank of America announces that it will purchase Countrywide Financial in an
all-stock transaction worth approximately $4 billion.
Ten days later, on Jan 21, 2008, the Fed surprised markets via an unscheduled
announcement that they were cutting the ff target 75 basis points to 3.5%. Click Here for
the statement.
Nine days after the Jan 21 cut, the Fed, at the scheduled FOMC meeting on 1/29 – 1/30
cut the target by 50 basis points so now the target is 3%. Click Here for statement.
Fast forward to March 2008 – the Fed was extremely busy trying to get liquidity to where
they never dreamed of getting it – extending it to basically whoever needed it. ALSO,
BEAR STERNS GOES POOF ON MARCH 14 SHOCKING MARKETS! The following
press releases capture this activity!
March 7, 2008 | Federal Reserve Press Release
The Federal Reserve Board announces $50 billion TAF auctions on March 10
and March 24 and extends the TAF for at least 6 months. The Board also
initiates a series of term repurchase transactions, expected to cumulate to $100
billion, conducted as 28-day term repurchase agreements with primary dealers.
March 11, 2008 | Federal Reserve Press Release | Additional Information
The Federal Reserve Board announces the creation of the Term Securities
Lending Facility(TSLF), which will lend up to $200 billion of Treasury securities
for 28-day terms against federal agency debt, federal agency residential
mortgage-backed securities (MBS), non-agency AAA/Aaa private label
residential MBS, and other securities. The FOMC increases its swap lines with
the ECB by $10 billion and the Swiss National Bank by $2 billion and also
extends these lines through September 30, 2008.
March 14, 2008 | Federal Reserve Press Release
The Federal Reserve Board approves the financing arrangement announced by
JPMorgan Chase and Bear Stearns [see note for March 24]. The Federal
Reserve Board also announces they are “monitoring market developments
closely and will continue to provide liquidity as necessary to promote the orderly
function of the financial system.”
promote the orderly function of the financial system.”
March 16, 2008 | Federal Reserve Press Release | Additional Information
The Federal Reserve Board establishes the Primary Dealer Credit Facility
(PDCF), extending credit to primary dealers at the primary credit rate against a
broad range of investment grade securities. T
The Federal Reserve Board votes to reduce the primary credit rate 25 basis
points to 3.25 percent, lowering the spread between the primary credit rate and
FOMC target for the federal funds rate to 25 basis points. The Board also votes
to increase the maximum maturity of primary credit loans to 90 days.
March 18, 2008 | Federal Reserve Press Release
The FOMC votes to reduce its target for the federal funds rate 75 basis points to
2.25 percent. The Federal Reserve Board votes to reduce the primary credit rate
75 basis points to 2.50 percent.
March 24, 2008 | Federal Reserve Bank of New York Press Release
The Federal Reserve Bank of New York announces that it will provide term
financing to facilitate JPMorgan Chase & Co.’s acquisition of The Bear Stearns
Companies Inc. A limited liability company (Maiden Lane) is formed to control
$30 billion of Bear Stearns assets that are pledged as security for $29 billion in
term financing from the New York Fed at its primary credit rate. JPMorgan Chase
will assume the first $1 billion of any losses on the portfolio.
The Fed’s next move was April 30 where they lowered target to 2% and kept it
there through September, when we enter the peak of the financial crisis
September 15, 2008 | Bank of America Press Release
Bank of America announces its intent to purchase Merrill Lynch & Co. for $50
billion.
September 15, 2008 | SEC Filing
Lehman Brothers Holdings Incorporated files for Chapter 11 bankruptcy
protection. Bye bye!
September 16, 2008 | Federal Reserve Press Release
The Federal Reserve Board authorizes the Federal Reserve Bank of New York to
lend up to $85 billion to the American International Group (AIG) under Section
13(3) of the Federal Reserve Act. THIS REALLY UPSET BEN BERNANKE –
DURING TESTIMONY, HE SAID HE SLAMMED THE PHONE AFTER THE
CALL – MORAL HAZARD AT ITS WORST – SO WHY DID HE DO IT???
September 16, 2008 | Federal Reserve Press Release
The FOMC votes to maintain its target for the federal funds rate at 2.00 percent.
September 16, 2008 | Reserve Funds Press Release
The net asset value of shares in the Reserve Primary Money Fund falls below
$1, primarily due to losses on Lehman Brothers commercial paper and mediumterm notes.
September 17, 2008 | Treasury Department Press Release
The U.S. Treasury Department announces a Supplementary Financing Program
consisting of a series of Treasury bill issues that will provide cash for use in
Federal Reserve initiatives.
September 17, 2008 | SEC Press Release
The SEC announces a temporary emergency ban on short selling in the stocks of
all companies in the financial sector.
Click Here for an awesome article describing the ‘attack’ on Morgan Stanley –
recall the ‘hope my neighbor wrecks credit default swap example?’
Let’s look at the reserve market during the last half of 2008
3.0
Data Range 07/01/2008 1/23/2008
Verti c al l i ne equal s 9/15/2008 BYE BY E LEHMA N!
2.5
Look how c razy thi ngs
bec ame after 9/15
2.0
1.5
1.0
0.5
0.0
7/01
8/20
10/09
FF
11/28
1/17
T ARG
THE LAST OFFICIAL DAY OF A TARGET NUMBER IS 12/15 – BEGINNING
WITH 12/16 – THEY WENT TO THE ZERO BOUND!!!!!!!!!!!!!!! Click Here for
Statement
Click Here for article page from fall of 2008