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Busch: Failure Not An Option As World Awaits G7

Friday, 10 Oct 2008 | 9:49 AM ET

As an example of why credit remains locked, overnight Japan's Yamato Life Insurance failed with debt of about 270 billion yen. Moody's has downgraded both Morgan Stanley and Goldman Sachs .

Finally after saying for months that his bank was in good shape, Royal Bank of Scotland Group'schief executive Fred Goodwin is expected to be among the most likely to go to the government for funding under the U.K.'s ambitious new bailout plan according to the WSJ. This is what counterparty risk is all about and why no one is lending beyond overnight.

As global finance ministers gather in Washington, stock markets continue to price in the reality of a global credit crunch that can't be resolved yet. The latest discussions amongst Fed/Tsy/WH officials centers around a similar UK plan that guarantees interbank lending for 36 months and a guarantee of all bank deposits. The first part of the plan is targeted at cooling counterparty fears and the second is targeted at cooling depositor fears.

Japan will present a new program to mobilize countries foreign currency reserves to help fund emergency loans to emerging nations facing the financial crisis. This would be under the auspices of the IMF which already has $200 billion available to it for countries in trouble. Besides Iceland, two other countries quickly come to mind: South Korea and Indonesia.

South Korea's Finance Minister Kang Man-soo also plans to meet executives of Citigroup, Morgan Stanley and Goldman Sachs Korea's efforts to secure expanded credit lines to local banks. Indonesia's stock market remains closed for the 3rd day in a row. The head of the exchange said the decision was made "to protect investors and prevent further sharp falls" in the market. "We are here to protect our financial markets entirely, not just the stock market. We also do not want the rupiah to collapse."

Another plan that is circulating involves using the custodian holdings of US Treasury securities at the US Federal Reserve. Currently, there are around $2.5 trillion of custody holdings of which $1.5 trillion are in Treasuries and $1 in agency bonds. These are not available to be loaned out unless foreign governments give permission. The idea would be that the Fed takes these securities and loans them to banks and in return the Fed agrees to take lesser instruments like commercial paper or mortgage backed securities. This has the added benefit of circumventing any need to raise the statutory debt limit and would only cost if the lesser instruments default.

As I've been writing, these are all part of the "everything-but-the-kitchen-sink" theme to do what is necessary to arrest the decline in the stock markets and the collapse of the credit markets. The downgrading of banks, the warning of a collapse in auto sales in 2009, the closing of emerging market stock markets, and concern over settlement of Lehman CDS trades adds to the mounting uncertainty.

I believe that something is brewing in DC and we will get announcements over the weekend. The volatility should remain as we have a holiday on Monday in the United States. With rumors of US closing their stock market on Monday, failure is not an option right now.

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Andrew Busch

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