In case you were wondering what this past week’s announcement of massive global central bank intervention has to do with the US Mortgage Market, the answer is: Everything.
On Wednesday, the European Central Bank, the Bank of England, the Bank of Japan, the Central Bank of China, the Swiss National Bank and the US Federal Reserve announced that they would be making available dollar loans at a reduced rate and for a longer term out to February 2013 to any banks looking to borrow dollars. You might ask, “what is going on here”?
The answer is “we don’t know for sure”. But we can surmise that some European banks were finding it difficult to fund themselves in dollars. Money market funds in the United States, traditional lenders of dollars, are reducing their exposure to European bank credit because no one knows for sure whether these banks are solvent. We do know that many of these banks own hundreds of billions of Euros of European sovereign debt, including Greece, Portugal, Ireland, Italy and Spain and it’s not clear what their exposure is and to what extent the European Union will support these credits.
Of course, these debts, since they are denominated in Euro, can be funded by the banks’ traditional deposit base. The problem is that these same banks own billions of dollars US mortgage securities and these also need to be financed. Because of the ongoing crisis in Europe, traditional dollar lenders to these institutions are backing away. Absent the coordinated central bank intervention, these banks would have no choice but to sell their assets into a very weak, fractured market, causing billions of dollars of market losses and, probably, wiping out the equity of most these banks.
So while the equity markets had their best week since the market bottom of March 2009, the underlying fundamentals of the global banking system are still somewhat suspect.
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