Afternoon selling left Wednesday's stock market slightly lower (Mar. 12).
*****
Amidst all the happy words and noises that followed yesterday's story that "Fed Offers $200 Billion Lifeline for Spurned Debt," most news accounts either failed to include or buried the truly relevant details:
"As collateral, the Fed will accept debt or mortgage-backed securities issued or guaranteed by Fannie and Freddie, also known as "agency" securities. It will also accept other residential-mortgage-backed securities, provided they are rated triple-A and not on watch for downgrade....
"The Fed is requiring the collateral to exceed the amount of the loan to protect against losses, so dealers could be surrendering more than $200 billion of mortgage-backed securities to the central bank. That figure still equals less than 5% of all agency mortgage-backed securities."
Looked at closely, the Fed's "Offer" of a "Lifeline" comes attached with the kind of terms you'd expect from a benevolent loan shark. Banks can "borrow" Treasury securities from the Fed, but those Treasuries must be "repaid" in 28 days. And, the "borrowing" must be more than fully collateralized -- meaning, the Fed won't even recognize the face value of AAA-rated mortgage backed securities. Banks must put up more than $200 billion in collateral, in case that collateral loses value in the next 28 days.
These terms make the whole thing a bad joke. What's more, the butt of this particular bad joke is anyone who believes the Fed has delivered "a shot in the arm to stressed financial markets."
As columnist Floyd Norris points out, yesterday was the ninth time since August 16 that the Fed has "done something." The S&P 500 is up a net 81 points on those days, but down a net 173 points on the other days (and 6.5% lower overall since August 16).
The story is even worse for the S&P Financials index -- slightly net higher on Fed "announcement" days, far more net lower other days, down 24% overall since August 16.
None of this is a surprise. I would say that the Fed's influence is quantifiable, except that the quantification process itself shows the Fed's influence is nonexistent; the only real surprise is that anyone still imagines it exists at all.