Financial market turmoil continues unabated with the major development this week being the evaporation of lending in the inter-bank market, necessitating liquidity injections from the world's leading central banks. The proximate catalyst for that was the announcement on Thursday by BNP that it was freezing redemptions because it could not accurately value the assets held in three asset-backed securities (ABS) funds. Liquidity injections were needed again on Friday as banks demanded interest rates well in excess of central bank benchmark overnight interest rates for a second day in a row. For example, Fed funds opened on Friday at 6%, 0.75% higher than the Fed funds target rate. The Fed added liquidity, in three separate operations, to bring the rate back to the target level of 5.25%, while also opening the discount window, the Fed's last-resort lending facility. I don't know yet whether any banks had to go to the discount window (probably not given the Fed's repeated repo operations), but if any have it'll lead to another ratcheting up of credit concerns.  Full text »

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