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Sunday, 21 September 2008

central banks short term liquidity & taking in the shorts

Central banks and regulators around the world on Thursday offered $180bn of liquidity to banks outside the US that are desperate for dollars, and mounting fresh assaults on short-sellers dragging down financial stocks. Less obvious in the news reports was that the Federal Reserve gave central banks in Japan, the eurozone, the UK, Switzerland and Canada the $180bn to lend on to local banks that cannot access its onshore dollar lending facilities. This followed on from action on Tuesday by central banks round the world to limit the fall-out from the collapse of Lehman Brothers by providing billions of dollars of short-term funds into their respective banking systems in an effort to boost the financial system’s liquidity as banks were short of cash with exposures to Lehman Brothers tied up in bankruptcy proceedings - overnight bank borrowing spreads soared. On Monday The European Central Bank injected €30bn ($42bn) in one-day liquidity while Bank of England said it could or would offer £5bn of extra reserves in the sterling money markets. The ECB's funds were at a marginal rate of 4.3% (average 4.39%), but 51 banks bid €90.3bn led by the irish and household names in banking in other countries. The ECB said it “continues to closely monitor the conditions in the euro area money market”. I received two calls from analysts in US investment banks asking me why it is that overnight deposits had fallen and rates risen. I had to laugh.
Then also the SEC took on the equity market short sellers, banning naked short selling in 799 financial stocks until October 2nd with the option of 10 day extensions, and by applying 3 rules (plus an exemption to allow firms to buy their own stocks?), even if more for effect than knowing whether they could actually stop short selling? The big board traders on the floor of the NYSE certainly didn't like short sellers stealing their business, never mind the false market they were creating as much by appearance as actually. For details on this see:
This was partly prompted by Andrew Cuomo, the New York attorney-general, announcing an immediate investigation into the recent short-selling activity of financial companies' shares.It was with this example that the FSA took similar action in the UK, partly prompted by the Liberal Democratic party. See:
A list of 32 financial service firms (banks, asset amanagers and insurers) are to be protected:
The list does not include the Irish or other foreign banks, but the Irish stock exchange followed the FSA and also banned short selling. Australia banned short selling - from Monday. There have been no news in UK of similar action in other European exchanges, but CBFA in belgium banned short sales of financial stocks on Euronext Brussels (much to the relief of Fortis), France too and the French AMF said it would discuss matters with all regulators. BaFin in Germany has banned short selling on banks and insurers, also Consob in Italy, and regulators in Portugal, Switzerland, Canada and Taiwan, all to avoid what is called abusive arbitrage, a term that defines quite a lot of trading at any time, and what many people believe is the forte of hedge funds, and even macro-funds, though hopefully not? The FT described this as "The UK's watchdog took the drastic steps of banning the short-selling of financial stocks - a move unprecedented in modern times". That may be, but the FSA could have halted trading in UK banks' shares earlier on the basis that the markets are inefficient and disorderly. That too would have been unprecedented and a very hard call until it became apparent that the US authorities were prepared to go all the way and quarantine all toxic assets, by which time other drastic action seemed no longer required!

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