The Federal Reserve injected another $6bn into the US banking system, as industry insiders predicted the bleak outlook for leveraged finance would continue into 2008.
The Federal Reserve repurchased $47.25bn in the markets through three repo agreements, taking $20bn of mortgage-backed securities as collateral. Since the Fed was replacing agreements that were expiring, the injection itself totaled only $6bn into the banking system. The Fed has been taking an active role in trying to manage the ongoing issues in the credit markets. The Fed and the European Central Bank poured over $300bn into world markets in August in order to calm fears of a liquidity crisis. The Fed also lowered its discount lending rate to banks by 50 basis points.
A panel of bankers and analysts at a Standard & Poor's banking conference predicted more pain to come in the markets. Peter Nolan, managing director of Loan Capital Markets at JPMorgan, said: "We're right back to August in terms of how optimistic or pessimistic we are to syndicate deals. I don't think we've seen the beginning of a sustained recovery' even as the "building blocks" of one have been put into place.
Between May and October, the volume of completed leveraged buyouts fell to €19bn from the usual six-month average of €40bn that has predominated since June 2005, according to the European Central Bank's monthly bulletin. The average deal size has also fallen to €2.9b from €6.6bn. In addition, banks continue to announce bad news of writedowns. Barclays prepared investors for a $2.7bn writedown related to sub-prime losses.