Who Says You Can't Teach a NEW Fed OLD Tricks?

Today's comment is by Mike Burnick, Senior Editor, Global Markets Analyst and Editor of Market Shock Trader.

Dear A-Letter Reader,

The Fed blew it yesterday, no doubt about it.

The Bernanke Fed has expressed the desire to improve its communication with financial markets. And so yesterday they did just the opposite by taking another incremental baby step when they cut rates by just a quarter-point.

Investors were hoping for more substantial easing, or at least some soothing words, but got neither yesterday. This left markets with the impression that the Fed is insensitive to the growing credit crunch, or worse - that Bernanke just doesn't get it.

In a stunning about-face this morning, the Federal Reserve unveiled a surprise plan to ease the global credit crunch. Now they want to inject cash into the financial system.

The Fed came up with a new trick: They'll drop a well-coordinated combination of US$40 billion worth of direct liquidity into U.S. banks, and another US$24 billion in currency swap lines of credit with the European and Swiss central banks.

A synchronized move of this magnitude hasn't happened since the aftermath of 9/11.

Make no mistake: This IS a potential game-changer for gridlocked capital markets. The Fed is coordinating the measures with the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank to provide lines of credit to commercial and investment banks worldwide.

Here at home, the Fed is taking even more significant steps to inject liquidity into the financial system by setting up a "Term Auction Facility." The Fed will essentially pony up US$40 billion cash in two separate auctions. The first auction will take place on Monday with another following next Thursday. Additional "auctions" are scheduled for January too.

Here are two key points to this auction process:

#1 The Fed will auction off these funds to banks against a "wide variety of collateral." Translation: put up whatever you've got, including shaky mortgage-backed securities of questionable value.

#2 The auction will be opened to all "generally sound" financial institutions. Translation: ALL banks and brokers are welcome to participate, despite the US$80 billion in collective losses and write-offs they've taken in recent months.

On the heels of the Fed's actions, short-term Treasury notes and bills dropped in price. Dropping bond prices signals a sharp reversal in the flight to quality trade we saw yesterday, and in recent weeks.

Libor Rates Tell It Like It Is

You can see the thaw in frozen credit markets even more clearly in Libor lending rates. This is a key benchmark rate that big banks charge each other for overnight loans.

Libor rates typically hover very close to Fed funds, usually a fraction of a point higher. But in recent days, Libor rates shot up as much as 80 basis points above Fed funds. That's an unusually high spread indicating credit market anxiety.

After the Fed's move today, Libor rates tumbled quickly. Translation: the big banks are more willing to lend each other money in this new environment of abundant liquidity courtesy of the global central banks.

I tune in to CNBC periodically on days when some key news or event takes place. Sometimes I use CNBC to gauge market sentiment. But in general, I tune in for comic relief more than economic insights. However, one commentator whose opinions I respect: is bond market commentator Rick Santelli.

More than most of the TV talking heads, Rick seems to have an accurate read on what's taking place in global fixed-income markets. Today he said, "all the metrics of credit anxiety have reversed quickly."

Don't get me wrong: I still don't think the Bernanke Fed "gets it!"

Will the Fed Ever Get Something Right?

If they did, then why wait until today to unveil this liquidity plan that clearly took time to put together with several central banks signing off on the plan. The Fed's trick play should have been announced at 2:15 yesterday afternoon, along with the rate cut news, and a lot of unnecessary volatility could have been avoided. Once again, the Fed leaves investors scratching their heads, wondering what to expect next.

Bottom line: shell shocked investors, already reeling from the after shocks of the credit crunch (which is NOT yet over), should get used to volatility. I expect more booms and busts ahead until the Fed gets it right - if indeed it ever does.

However, it's clear that the Fed is willing to PRINT MONEY as necessary to ease the credit crunch. While it's clear that the Fed is behind the curve, it's tough to argue against the world's biggest printing press.

What was it that Marty Zweig used to say? "Don't fight the Fed!"

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: The Fed may be rolling out all the stops to keep the markets afloat. Who knows what trick they have up their sleeves next? But one thing is certain: No matter what bag of tricks the Fed dreams up next year, it won't be enough to completely heal all markets. Some sectors and markets will BOOM while others go BUST!

That's why 19 of our global experts are meeting up in St. Kitts this February 20 - 23 for The Sovereign Society's Emergency Money Summit. These seasoned professionals are bringing their best ideas on how you can survive - and thrive - while the credit crunch rages on. You're invited to join us! Sign up before January 1st, and you can even bring a guest with you - absolutely FREE.

Our Least Favorite Swiss Bank -
and Their Tale of Sub-prime Woe

UBS AG will write-off another US$10 billion in losses from the U.S. sub-prime lending market, the leading Swiss bank said Monday.

UBS has been forced to raise billions in capital. They've sold off shares to Singapore's government and an unidentified investor in the Middle East. The Government of Singapore Investment Corp., a sovereign wealth fund, is investing CHF11 billion (Swiss francs) (US$9.75 billion), while an undisclosed strategic investor in the Middle East is contributing CHF2 billion francs (US$1.77 billion).

UBS has admitted they will post a loss for the fourth quarter. In fact, they may now record a loss for the full year as well. That comes on top of the CHF4.2 billion written-off in its third quarter. All totaled, UBS has lost CHF14.2 billion (US$12.6 billion) from the sub-prime crisis this year.

Once, UBS was as reliable as one of the expensive precision watches that Switzerland is known for. Now UBS management looks anything but safe, efficient and prudent.

In October, the bank downgraded the value of some assets by more than CHF4 billion (US$3.4 billion) because of exposure to bad U.S. mortgages. The write-down led to losses of CHF830 million (US$712 million) in the period ending Sept. 30.

That was the first time in nine years the bank reported a quarterly operating loss.

The Swiss bank's losses from its ill-conceived bets on America's low-income mortgage market now stand at around US$14.2 billion. That puts it neck-and-neck with Citigroup as the biggest loser from the growing sub-prime crisis.

Long-time members of The Sovereign Society know that we never have recommended UBS as a Swiss bank for offshore accounts. That wasn't just because of UBS's monster size and impersonal service. We were more concerned with UBS's anti-privacy policy.

When Swiss Bank Corp and Union Bank of Switzerland merged, they created UBS AG.

The U.S. Federal Reserve Board approved the merger in 1999. But the Fed only approved after UBS supinely agreed to provide the U.S. government with all information "necessary to determine and enforce compliance with . . . [U.S.] federal laws."

This surrender went far beyond the financial information required to be exchanged under the existing U.S.-Swiss Tax Treaty. This agreement also nullified Swiss bank secrecy laws that usually required a court order to release private banking information.

UBS caved in after the U.S. government threatened to shut down the bank's extensive American financial operations. The UBS sell-out was bad news for financial privacy seekers - and it blew a large hole in the much vaunted concept of Swiss "bank secrecy."

Then and now we advise U.S. and other potential depositors to avoid UBS AG and any Swiss bank that has active U.S. financial operations and offices beyond a mere "representative office."

BOB BAUMAN, Legal Counsel

P.S. If you need advice on the best Swiss banks, The Sovereign Society will be pleased to assist you. Click here to learn more.

Currencies

Up Yen, Down Yen - at the Fed's Command

The Japanese yen shot up as soon as the Fed announced the rate cut yesterday. And if you were betting against the yen, then your currency trades went south.

For example, the New Zealand/Japanese yen NZD/JPY currency pair fell hard after yesterday's FOMC meeting. Many yen pairs hit the floor with a loud thud yesterday.

Many of the yen pairs lost 150-300 pips within hours (on yen strength). Traders didn't feel that the Fed did enough to stimulate the economy so they sold stocks with a fury. The Dow dropped a whopping 300 points.

The NZD/JPY pair dropped 200 pips within 3 hours following the rate announcement out of the United States. Traders grabbed their cash and ran for the yen as fast as possible.

However, overnight as markets recovered, NZD/JPY regained all of its losses that it incurred after the rate announcement. That resilience is quite impressive. It's also quite impressive how quickly the yen lost all its gains from yesterday.

SEAN HYMAN, Currency Director

P.S. To hear more about how the Japanese yen - aka the "global risk gauge" is saying about your stocks, tune in to today's My Two Cents. Don't receive our FREE currency E-Letter? Sign up right now so you don't miss a thing!