The global banking system has frozen up. There is no trust between banks and there is no trust by depositors of banks. This has caused a run on the banks, and has led to the failure of Washington Mutual and Wachovia. Internationally, several large banks have failed.



Bloomberg is reporting Libor Rises Most on Record After U.S. Congress Rejects Bailout.



The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.



The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.



"This is unheard of, the money markets should be the engine driving the financial system but they have broken down," said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender. "Any institution that hasn't completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out."



The seizure in the credit markets is tipping lenders toward insolvency, forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest provider of loans to local governments, and Wachovia Corp. Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.

Why the Paulson Plan Fails

Irish Government Moves To Safeguard Banking System

The Irish government Tuesday announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.



"It has done so following advice from the governor of the central bank and the financial regulator about the impact of the recent international market turmoil on the Irish banking system," the government said in a statement.



The government said it aims "to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets."



Finance Minister Brian Lenihan said Tuesday that the guarantee will mean a commercial charge for Irish banks, but this would be decided by the Central Bank of Ireland; he gave no more details on the charge.



He said that the decision to guarantee the banking system for two years was primarily aimed at addressing liquidity concerns, protecting taxpayers funds and crucially ensuring banking funds don't dry up.



Investors welcomed the news. By 0755 GMT, Allied Irish Banks PLC (AIB) was up 14% at EUR5.70, Anglo Irish Bank PLC (ANGL.DB) was up 22% at EUR2.81, Bank of Ireland PLC (IRE) was up 6.7% at EUR3.49, and Irish Life & Permanent PLC (IPM.DB) was up 22% at EUR4.35.



The guarantee runs from midnight on Sept. 29, 2008, and expires at midnight on Sept. 28, 2010, and follows the decision last week by the government to guarantee deposits in Irish banks up to EUR100,000.



The government said it aims "to remove any uncertainty" and "maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy."



Davy Research analyst Scott Rankin said: "The Irish government has taken out its bazooka."

This is urgent we must get this to EVERY senator before the Senate takes a vote.

How To Stop A Run On The Banks

Dear senator



Today the Irish government announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.



The Result



Investors welcomed the news. By 0755 GMT, Allied Irish Banks PLC (AIB) rose 14%, Anglo Irish Bank PLC (ANGL.DB) rose 22%, Bank of Ireland PLC (IRE) rose6.7% , and Irish Life & Permanent PLC (IPM.DB) rose 22%.



Why Ireland's Plan Works



What Ireland is fighting is the same thing that the Fed is trying to fight here (outflows from banks and money market funds into short term government debt.)



The problem is NOT mom and pop pulling bank deposits, it is corporate treasurers and state treasurers whose jobs are on the line pulling deposits from weak banks and putting them into stronger ones.



The fastest way for the US and other governments to solve this is to raise deposit insurance ceilings. This is a far better option than ballooning the Fed's balance sheet more.



Furthermore, I would highlight that fully guaranteed deposits would put the US government even more at the top of the capital structure of banks. Existing senior debt is all of a sudden now fully subordinated to a potentially unlimited amount of insured deposit debt.



Why the Paulson Plan Fails



The Paulson plan fails because it does not stop mistrust between banks or mistrust by depositors. All it does is throw $700 billion in taxpayer money down a black hole.



The Paulson plan is also unconstitutional. There is no constitutional authority for the US Government or the Federal Reserve to use public (taxpayer) money for what is definitely a private purpose (bailing out Wall Street).



Finally, the Paulson plan takes time to implement fairly, and there are many holes in the oversight process.



Stop The Run On Banks



Temporarily guarantee all deposits at US Banks. Implement rules to ensure weak banks do not misuse this privilege by adopting risky lending practices. Orderly shut down all undercapitalized banks.



Senator, please scrap the Paulson proposal in entirety and try something that might work, that is constitutional, and does not put taxpayer money at risk.



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