Libor easing, but still abnormally high

September 22, 2008

Overnight Dollar Libor fell 28 basis points to 2.97 percent on Monday. That’s 97 basis points higher than the Federal Reserve’s target rate, compared with an average 10 basis points during the past seven years.

The TED spread narrowed 9 basis points to 224 basis points today. Last week, it had exceeded the 300 basis points at one point.

One week Euribor, jumped 10 basis points on Monday to 4.65 percent, while the three-month rate rose 2 basis points to 5.03 percent. It is the highest level since November 2000.

Meanwhile, Goldman and Morgan Stanley have both filed applications at the Federal Reserve to become regular banks, either through acquisitions, or through the building of a deposit base.

Fed’s Statement:

“Release Date: September 21, 2008, for release at 9:30 p.m. EDT

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve’s primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.”

All the large investment banks of US have disappeared this year. It is the end of an era.

—-

All this has allowed tensions to ease considerably in the financial markets, albeit from extremely high levels. The scope and size of the Treasury’s rescue package will determine the direction of future developments. Nonetheless, as long as there’s uncertainty and fear in the interbank, and inter-institution financing, at one moment we may be faced with a shock again. Volatile is the word that describes the situation.

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