bizzXceleration: Performance, Value and Profit

In the biggest coordinated show of international financial force since Sept. 11, 2001, the Federal Reserve yesterday joined four other central banks in a plan aimed at coaxing banks to lend more readily at a time when fear has seized up world credit markets. Just a day after it cut its key rate for the third time this year, the Fed introduced a new tactic, saying it will extend up to $40 billion in special loans in the next eight days to banks. To stoke banks' appetite to borrow and lend, the loans will carry less interest than Fed loans to banks usually do, and still can be backed by a wide range of collateral -- including the high-risk home mortgages at the heart of the current financial crisis. The action was the latest in a series of attempts by the Fed and other financial authorities to stem the credit crunch that has resulted from the U.S. housing meltdown. None of those have thawed out the credit markets yet, however, and it isn't clear whether the latest salvo will be any more effective. The European Central Bank and the British, Swiss and Canadian central banks simultaneously announced new or expanded operations to prime their nations' banks with additional cash. The Japanese and Swedes chimed in with rhetorical support. The Fed also agreed to provide U.S. dollars to the ECB and the Swiss central bank that can be supplied to their dollar-hungry lenders. The Fed last took such a step in the days after al Qaeda's 2001 terrorist strike on America.The Fed has faced two intertwined challenges since the financial crisis hit in August. One has been to cut rates enough to cushion the economy from a collapsing housing bubble, without igniting inflation. The other has been to overcome the credit crunch that stems from the housing woes -- and has muffled the impact of the rate cuts. So far, the medicine isn't working. The rates banks offer to consumers and each other have stayed stubbornly high. The Fed tried to encourage financial institutions to borrow from its "discount window" but there were few takers. Separately, the Bush administration has prodded big banks to create a new entity to buy some mortgage-linked securities that aren't selling, and has pressed for mortgage-servicers to freeze interest payments on perhaps hundreds of thousands of homeowners whose mortgage payments are set to rise.

Many analysts were more sanguine than the market about the Fed's latest move, but emphasized the increasingly big challenge the Fed still has in making market rates respond effectively to its moves. "The Fed is feeling its way in the dark here," said Ian Shepherdson, chief U.S. economist of High Frequency Economics, a Valhalla, N.Y.-based research firm. "Current conditions are unprecedented in modern times. We think these measures are a step in the right direction, but there is simply no way to know for sure how effective they will be." The markets' muted response reflects a painful reality: The steps the Fed has taken since August haven't made a substantial difference in restoring confidence. It is now clear that a lack of cheap funding is only one reason banks and investors are so reluctant to lend. Financial institutions remain suspicious of each other after multiple rounds of announcements of mortgage-linked losses, and are anticipating more. They also are eager to hold onto cash to shore up their troubled balance sheets.

Fed's Credit Plan Favors Calming Markets Over Spurring Economic Expansion The Federal Reserve's coordinated response to the global credit crisis is aimed more at easing strains in financial markets than at averting an economic slump. The Fed, along with central banks in Europe, pledged yesterday to offer as much as $64 billion to financial institutions. The joint action is designed to break a logjam in money markets that pushed up borrowing costs for lenders worldwide. Fed officials told reporters that they view yesterday's intervention as distinct from their interest-rate policy, which they anticipate will promote ``moderate'' growth next year. By attempting to keep the two tracks separate, economists said, policy makers are gambling that they will be able to avert a recession that would force them into deeper rate cuts than would otherwise be the case.

·         Fed Splits With Markets Over Recession Prospects, Seeing Continued Growth Federal Reserve officials still expect the economy to grow and are reluctant to deliver the deeper interest-rate reductions demanded by some economists and investors.

Fed, ECB, Central Banks Join to Add Cash, Ease `Elevated' Funding Pressure The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks. The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks. The Fed said in a statement it will make up to $24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The Fed also plans four auctions, including two this month that will add as much as $40 billion, to increase cash in the U.S. Central bankers took the action after interest-rate reductions in the U.S., U.K. and Canada failed to allay concerns that banks will reduce lending, which may send the U.S. into recession and hobble growth abroad. Borrowing costs have climbed as mounting losses on securities linked to subprime mortgages caused lenders to conserve cash. A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash. The Fed will balance its various operations, including daily repurchases of Treasury notes and direct loans to banks.

• Fed, ECB, Central Banks Join to Add Cash, Ease `Elevated' Funding Pressure The Federal Reserve, European Central Bank and three other central banks moved in concert to alleviate a credit squeeze threatening global growth, in the biggest act of international economic cooperation since the Sept. 11 terrorist attacks.
• Everything You Want to Know About Today’s Fed Move But Didn’t Know Who to Ask

Why the Fed bailout might not work  The plan to make credit markets more liquid could end up having the opposite effect, Fortune's Peter Eavis reports. The Federal Reserve's latest move to make credit markets more liquid could deepen problems in the banking system and actually cause the markets to be even more illiquid. Wednesday, the Fed, along with other central banks, announced a plan that is designed to enable banks to borrow money directly from the Fed at below-market rates. This will allow a wider range of banks to access Fed credit, and simultaneously allow them to submit a broader range of collateral to the Fed when taking out those loans. Why do this now? The Fed explained in a release Wednesday: "This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress." In layman's terms this means that rates on loans between banks - measured by something called the London Interbank Offered Rate, or Libor - are too high for the Fed's tastes, so it is now prepared to itself lend to banks at much lower rates. What could go wrong with such an approach? Surely, it makes sense for banks to be lending to each other at lower rates, since that can spark more lending across the whole financial system. But Libor is a market rate, ultimately reflecting banks' views on each other's creditworthiness. Indeed, at 5.06% before news of the TAF was released by the Fed, Libor was considerably higher than the Fed funds rate, reflecting banks' caution about each other. But maybe the widened spread between Libor and the Fed funds rate is an inescapable product of the times. Given the credit problems U.S. banks are facing, they are naturally wary of each other. Maybe the Fed thinks banks are being overcautious, so the TAF is its way of bypassing what it sees as unwarranted skittishness. But it makes more sense to believe the banks' view of each other than the Fed's.

·         Euro Lending Rate Stays at Seven-Year High After Banks Try to End Gridlock Interest rates on loans in euros stayed at a seven-year high, a day after central banks in Europe and North America teamed up in an attempt to end gridlock in money markets. Three-month borrowing costs held at 4.95 percent, the British Bankers' Association said today. That's 95 basis points, or 0.95 percentage point, more than the European Central Bank's benchmark interest rate, compared with 57 basis points a month ago. It averaged 25 basis points in the first half of the year, before U.S. subprime-mortgage losses contaminated money markets. Rates at their highest since December 2000 suggest the first coordinated central bank action since the Sept. 11, 2001, terrorist attacks isn't enough to revive interbank lending. The cost of borrowing dollars fell 7 basis points to 4.99 percent today, still close to the highest compared with the Federal Reserve's target rate since 1999.