Briefly Speaking (liquidity and credit)

One of the reasons my firm has taken the (prescient)view that the worst of the credit malaise is behind us is the extraordinary measures taken by the Fed, and the Term Auction Facility in particular.

A bombastic and loud member of the media regaled the Fed last August to "OPEN THE DISCOUNT WINDOW!!".

We knew this was not likely to occur, and that the credit crunch would continue.

Why?

When your counter-parties to trillions of dollars in levered assets are other multi-national investment and commercial banks, you do NOT want to SIGNAL to them that your institution has borrowed funds from the discount window. It is not a secretive process and the entire world will know what you have done, and, as we have seen, rumors can do massive damage to institutions whose main asset is confidence in their financial position.

So no-one took advantage of the Fed's commitment to open the window to all-comers (subsequently, recently, several investment banks borrowed at once to "remove the stigma").

So the Fed saw the conditions, and suprisingly enough, innovated a solution. The Term Auction Rate Facility is more anonymous and has been a tremendous success thus far.

This is one of the reasons we see the worst of the credit crisis (save more write-offs of a billion here, a billion there...) is now over.