Money Market Freeze

When one wants to make tons of money, it must be surrounded by thousands of crazy, "says an old adage in the stock market. He reiterated when Warren Buffett announced an investment of $ 5 billion in Goldman Sachs (GS) and $ 3 billion in General Electric (GE) to fetch the interest of 10% per year in addition to warrants convertible free stock for the next 5 years in depressed prices.

He was regarded by many as a sign of confidence of any investor's most revered and legendary of all time, Warren Buffet. Nobody bothered to ask the issuing companies, why was he given the yield of 10% which is normally associated with junk bonds degree or businesses. Did this bluest of blue chip companies has escalated into "junk bond"? Are they in line next to "Olympics 2008 Parade of financial bankruptcy?"

Nobody even noticed the rapid transformation of the legendary investor in usurious money lender at his advanced age of 78 years. Has anybody noticed that there was no real liquidity crisis, but lenders like Mr Buffet can be aligned on the sideline looking for the risks of return (RRR) of potential borrowers. "More risk, the more you pay "was the simple message displayed on the front of each lender possible.

Otherwise, when the Fed was ready to lend to the meager 1.5%, why the GS and GE to pay up to 10% to Mr. Buffet? Within hours of receiving 3 billion dollars of Mr. Buffett, GE rushed to the commercial paper market to raise additional funds for the payment of wages and salaries, and was pleased to see the Fed chief Bernanke dressed as Santa Claus, spend billions more to only 2% (cut to 1.5% the next day). In short, $ 3 billion from Warren Buffet seems to have "Gone with the Wind" in a few hours.

What Mr. Warren said buffer has been misunderstood and misinterpreted by almost everyone on Wall Street, Main Street, Capitol Hill, the Fed, and the entire community of journalists, analysts, commentators and investigators. It meant, but did not say that the real market rates were high, irrespective of billions of dollars being printed in the courtyard of the Federal Reserve, for free distribution later, and nobody was willing to pay unless he has been rewarded by the return associated with a risk. (RRR)

Across the Atlantic in London, relatively free market, LIBOR rates rose to the highest, and yet no one emerges as a lender to lend to the same commercial bank.

Why look for lenders higher returns when the risk increases?
If the lender is ready today for only $ 100 3% (EDF when the rate is only 1.5%), and the loan goes bad, it has to lend him 33 times (100 / 3) more accurately recover the old loan, and that too, provided no new loans going bad. If he had loaned to say 24%, and if things go wrong, it should pay only 4 times more to recover its old loans, again assuming all new loans are good. Therefore local governments to raise funds at 20% or more in some cases. In other words, there are donors out of Mr. Buffett.

When the risk profile of banks have increased as the bankruptcy of hundreds of billions of dollars, the money market will become very tight, and lenders retreat into shelters, where market rates continue to be managed low by the Fed. Action by the Fed to pump markets with over $ 900 billion per day before a.