Massive Borrowing From Fed

There may be some early signs that the market is emerging from the recent financial volatility.

Primary dealers borrow $37 billion from Fed

Investment banks and broker dealers borrowed more than $30 billion a day from the Federal Reserve's discount window this past week, but showed only tepid interest in a separate 28-day lending facility from the Fed that got under way on Thursday.

The 20 primary dealers borrowed $37 billion from the discount window on Wednesday, $8.2 billion more than the previous week. For the entire week, loans to the 20 primary dealers averaged $32.9 billion a day, up $19.5 billion from the previous week.

This liquidity removes a large aspect of risk for the market and investors. Very clearly, the Feds are not going to allow major components of the financial system to fail.

A key item, in my view, comes a little later in the article:

"Dealers did not show any signs of being desperate to liquefy collateral," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co.

"The fact that dealers did not bid aggressively for funds would seem to suggest that funding problems are not widespread," wrote Lou Crandall, chief economist for Wrightson ICAP.

All told, the Fed has offered to lend the banks up to $200 billion for 28-day terms. Crescenzi said the results of the first auction indicate that perhaps not all $200 billion will be needed.

Simply put, the lack of interest in the loans indicates to me that, as of the moment, the corner has been turned on the mortgage-backed security shakeout in the market. If that is true, I would expect to see the economy and market begin to move forward the second half of this year.