The Binary Circumstance

The Federal Reserve auctioned off another $20 billion to banks in the second in its series of auctions designed to provide more money to banks.

WASHINGTON (AP) — The Federal Reserve, working to combat the effects of a severe credit crunch, announced Friday it had auctioned another $20 billion in funds to commercial banks at an interest rate of 4.67 percent. Fed officials pledged to continue with the auctions “for as long as necessary.”

The central bank said it had received bids for $57.7 billion worth of loans, nearly three times the amount being offered, indicating continued strong interest in the Fed’s new approach to providing money to cash-strapped banks.

It was the second of four scheduled auctions. The first auction, on Monday, of $20 billion resulted in loans being awarded at an interest rate of 4.65 percent. There were 93 bidders seeking $63.6 billion at the first auction and 73 at the second.

Two more auctions will occur in early January. In a statement Friday, the central bank said it would continue with further auctions “for as long as necessary to address elevated pressures in short-term funding markets.”

With more bad news each day about the extent of the sub-prime mortgage problem, banks are afraid to loan each other money. It seems that the purpose of these auctions is for the Federal Reserve to step in as lender of last resort to provide short-term money so that the banks can continue to function.

Yesterday, bond insurer MBIA was hammered in the stock market when the extent of its exposer to sub-prime mortgages was revealed.

NEW YORK (AP) — The credit crisis spread to the nation’s largest bond insurer Thursday, sending shares of MBIA Inc. plunging and calling into question the safety of tens of billions of dollars of company and local government debt held by investors.

The Fitch Ratings service warned that it might cut its rating on MBIA in the next six weeks if the company cannot find $1 billion in new capital. That followed a disclosure by MBIA that of the $30 billion in mortgage debt guarantees it issued, some $8 billion were for the the riskiest types.

One analyst said he was shocked by the magnitude of that exposure. A call seeking comment from MBIA officials at the company’s headquarters in Armonk, N.Y., was not returned immediately Thursday.

[…]

MBIA shares plummeted more than 26 percent Thursday, falling $7.07 to $19.95 and wiping out more than $880 million in market capitalization.

MBIA is the largest of the “AAA” bond insurers, those that are viewed by rating agencies as having so much financial and claims-paying strength that they deserve the highest rating.

Because of its size, many analysts have warned of dire consequences for the bond market if MBIA is downgraded, which would effectively prevent it from issuing new policies.

[…]

Another credit rating agency, Standard & Poor’s, said it fully incorporated MBIA’s exposure to mortgage bonds and CDOs when it affirmed the insurer’s “AAA” rating Wednesday. But S&P did place the company on a negative outlook, which means it views the company as having a one-in-three chance of being downgraded in the next two years.

The action on MBIA was one of a handful of bond insurer warnings and downgrades S&P made Wednesday, the sum of which S&P said could lead to a fundamental change in the way the bond insurance industry operates. In particular, it downgraded insurer ACA Capital to “CCC” from “A,” a move that affected billions of dollars in municipal bonds nationwide.

The herd effect drives most people, including most of the professionals, when it comes to making investment decisions. With the Internet bubble and now this housing bubble which was financed largely by the irrational rush to loan money to sub-prime borrowers at artificially low rates, it always ends in large financial losses for most and very large profits for a few.

While I’m on the subject of central bank intervention in the market, I’ll note that presidential candidate Ron Paul wants to get rid of the Federal Reserve, the U.S. version of a central bank and the cornerstone of our fiat money system.

I can assure you that the other candidates, like most Americans, have no idea how the Fed works.

Paul was recently on Jim Cramer’s Mad Money and his comments can be viewed on this YouTube video. Cramer annoys the hell out of me, but Paul’s message on the Fed is important. Just put your fingers in your ears when Cramer is screeching.

See my other Ron Paul articles.

Republican/Libertarian presidential candidate Ron Paul, who still lags way behind most other candidates in the polls, is breaking more fundraising records. The interesting thing about Paul’s fundraising is that his money comes mostly from small individual contributions on the Internet.

In 2004, on the day John Kerry accepted the Democratic presidential nomination, the Boston senator raised $5.7 million on the Internet, the biggest online fundraising day on record.

Yesterday, Ron Paul, the Republican congressman whose rock star status on the Internet has singlehandedly fueled his campaign, broke that record, raising nearly $6 million in 24 hours.

On Nov. 5, which was Guy Fawkes Day, a symbol of rebellion in British history, Paul hauled in $4.3 million in 24 hours. And yesterday, the 234th anniversary of the Boston Tea Party, the day that helped spark the American Revolution, Paul’s Web-savvy, intensely loyal supporters completed another “money-bomb,” raising nearly $6 million from more than 50,000 donors, half of whom were new donors. With 14 days left in the fourth quarter, the Texas Republican has amassed more than $17.5 million.

Ron Paul’s campaign had set a goal of $12 million in the fourth quarter which they have already topped by 46% with two weeks left to go.

I have already stated my problems with Ron Paul in previous posts. But what I find interesting is that so many people see Barack Obama as the man with new vision, an agent for change. Unlike Obama, Paul has a long record in Congress and consistently voted against the Iraq war. He has also demonstrated through his Internet fundraising successes that he is unlike any other candidate in his ability to get financial support from individuals as opposed to the large corporate donors who are supporting the leading Democratic and Republican candidates.

Ron Paul may have a lot more surprises up his sleeve in the months to come as well as the money to finance them.

My other Ron Paul articles.

The official line is that the stock market rose today because the European Central Bank pumped a massive infusion of a half a billion dollars into the financial system.

NEW YORK (AP) — Stocks rose Tuesday after investors found solace in the European Central Bank’s $500 billion loan issuance, but the possibility of recession in 2008 made for a back-and-forth session.

The ECB’s massive 16-day tender supported the idea that the world’s central banks are working to revive demand in struggling areas of the credit market. The Bank of England also said it will offer additional reserves to lenders Tuesday, after the U.S. Federal Reserve on Monday auctioned off $20 billion in 28-day credit.

I would say that means they are scared, very scared.

“It’s very disconcerting that we’re getting central bank interventions for a problem that many were hoping would be a self-contained one,” said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.

When banks make loans they just make up new money. In the end that dilutes the value of the existing money supply causing more inflation.

The problem is that with all the bad loans and potentially bad loans on the books and economic uncertainty on the horizon, nobody knows what the real value of the underlying assets are or the many mortgage backed securities that have been created from the original, now-going-bad, loans.