Central Banks May Be Pushing On a String

The crisis in the housing market came full circle Friday as major mortgage lenders Countrywide Financial (CFC Quote - Cramer on CFC - Stock Picks) and Washington Mutual (WM Quote - Cramer on WM - Stock Picks) separately expressed concerns about market conditions and their ability to raise cash.

"While these market conditions persist, the company's ability to raise liquidity through the sale of mortgage loans in the secondary market will be adversely affected," WaMu said. This echoed a similar statement from Countrywide Thursday night.

These two firms were among the first to feel the pinch earlier this year from rising delinquencies and falling demand for mortgages. Problems in the subprime market then started to roil the so-called secondary markets for mortgage-backed securities and other derivative products, (CDOs and CMOs).

That, in turn, spurred spring and summer losses felt by investment funds managed by Bear Stearns (BSC Quote - Cramer on BSC - Stock Picks), Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) and BNP Paribas. Now, those and other funds are no longer willing and/or able to buy mortgage-backed and related securities, which is putting a further crimp on the operations of lenders such as Countrywide and WaMu.

Central banks worldwide have responded to the burgeoning crises, with limited success so far.

On Friday, the European Central Bank injected $84 billion into the banking system, bringing its two-day total to about $215 billion; major averages in Europe tumbled nonetheless. Other policymakers, including the central banks of Japan, South Korea and Canada, made similar statements and/or actions, which similar response in local markets.

Following a $24 billion injection Thursday, the Fed put out an additional $35 billion in two tranches Friday morning prior to 11 a.m. EDT. The Fed injected liquidity for a third time -- $3 billion -- at approximately 1:30 p.m.)

The Fed also issued a statement declaring it is "providing liquidity to facilitate the orderly functioning of financial markets."

Despite these injections, major averages tumbled in Asia and Europe, including declines of 4.2% for South Korea's major bourse and 3.7% for London's FTSE 100. While off earlier lows, the Dow Jones Industrial Average was recently down 0.6%, while the S&P 500 and Nasdaq Composite were off about 0.4% and 0.6%, respectively.

Fed Targets Discount Rate

For practical purposes, the Fed's liquidity injection was not in direct response to what Countrywide and WaMu said, or to "bail out" any particular hedge fund(s). Rather, the Fed was responding to the 6% rates banks were seeking to lend to other banks overnight, well above the fed funds target of 5.25%. By injecting liquidity into the financial system, the Fed hopes to encourage borrowers and entice lenders to bring down their rates.

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