Freeze plan may help deepen the crisis: Bianco

NEW YORK (Reuters) - The U.S. Treasury plan to freeze interest rates on certain subprime mortgages will not help the banking system avert losses and prevent housing prices from falling, said Jim Bianco, president of Bianco Research.

"All these plans are designed to keep reality from happening. And reality is that the losses are much worse than we all expected," Bianco said at the Reuters Investment Outlook 2008 Summit in New York.

For credit markets to hit bottom, Bianco said, home prices would need to decline further and more banks would have to fully admit to losses and write-downs stemming from the collapse in structured securities.

"They all want to buy time because there's just way too much losses in banks, some may be even undercapitalized and no one wants to be the executive responsible for putting those losses in the balance sheets, because that means you are going lose your job," he said.

"But the longer we take, the more home prices will slow and the worse losses will be," Bianco added.

The Federal Reserve's decision on Tuesday to cut the federal funds and the discount rates by 25 basis points to 4.25 percent and 4.75 percent, respectively, will also have a limited impact on the markets, he said on Tuesday.

"This is an environment where the problem is credit and the fed funds rate is not going to help solve that problem," he said. "To begin with, lower interest rates got us where we are now. The Fed may be trying to solve the problem of a bubble burst by creating another bubble."

Short-term market interest rates should be following fed funds, but that has not been the case in the past couple of months, Bianco said. Instead, the correlation of such rates and the London interbank offered rate (LIBOR) is increasing. This means short-term borrowers are experiencing a tightening since market-based rates are rising.

"I do believe there's a role for the Fed in this crisis, but it would be more targeted to fixing the spread between fed funds and LIBOR," he added.  Continued...