fed discount rate cut. this is more for me understanding financial markets....but?

Question

It was on bloomberg online video news.I didn't really get how the rate differential is related to what is happening with coperate bonds and T-bills( rediculously low yield). A guest from Lehman Brothers also mentioned something like "currency swap with ECB" as the next step.....how does all of this comes together. I just want to understand what I heard.

Answer 1

Last Wednesday morning, brokers in London went to sell forty two billion euros in daily commercial paper. Short term iou's to companies. Normally this takes less than an hour. By noon less than half had been bought. Major firms were suddenly legally bankrupt because they were billions of dollars in default. By dropping the rate, banks could borrow unlimited sums and buy this paper for a profit. Otherwise, principal global firms would be already sending out the closed for business notice. The problem isn't localized to London. Banks in the US are having trouble raising money. The Fed is loaning nearly unlimited sums to any bank that needs cash to keep its doors open, provided of course it can present collateral.

Answer 2

The discount rate, which is the interest rate for loans made by the Fed to banks, is basically meant to boost confidence in the financial markets that the Fed is on the job and will help banks get through the current market crisis. It doesn't do a whole lot to directly alter anyone's borrowing costs, since banks rarely borrow from the Fed. The discount rate cut is an expression of sympathy more than anything else, but it does seem to have stabilized the market for the last couple of days. Who knows, however, what will come tomorrow.

Answer 3

call lehman