This morning the Fed announced yet another new program to provide liquidity to failing markets. The program is called the Term Securities Lending Facility (TSLF).



The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.



In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.



Pulling Out All The Stops

Two quick observations this morning regarding the Fed announcement: First, as I write the headline on Marketwatch reads "The Fed Pulling Out All The Stops." While the short covering rally will suggest euphoria, I can not emphasize enough how much the regulators have raised the stakes this morning. As any church organist will tell you, you can't make the sound any louder once you "pull out all the stops."



Second, and just as important, the line-up of regulatory participants in this morning's actions spanned the globe - from the ECB to the Bank of England to the Bank of Canada to the Bank of Japan: an unprecedented step. By my count these central banks, along with the Fed, manage the monetary policy for economies representing almost 90% of global GDP. Anyone still harboring the notion of "decoupling" may want to reflect on the implications of today's actions.

Running Out Of Bullets

The Fed is taking this step to avoid complete financial collapse. That much is becoming evident very quickly. They are using up their bullets much more quickly than they want to, thus confirming the severity of the state of the financial system, something Minyanville has been pointing out for some time.



Their last bullet comes when they directly lend to some major institution in a big way to avoid its collapse.



As far as this move, it does nothing to solve the solvency issue. The Fed is just saying we will take that risk for the market. That is very similar to nationalization. The irony is that the Fed continues to address the situation as if it is a dislocation from fundamentals (or they continue to hope that people view it that way. In actuality this is exactly what should be happening to these credits: the market should destroy them.



The government will never give up trying to forestall the inevitable, but that does not mean they have the power to do so. Stay the course: It is still early in this unwind with more flawed logic from the government to come.



Mr. P.

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