Central bank plan delays day of reckoning

By Herbert Lash

NEW YORK (Reuters) - A number of money managers are up in arms over a plan by several central banks to thaw frozen credit markets because it will stop investors from feeling the pain of failed bets.

The Federal Reserve, along with the European Central Bank and other central banks, announced steps on Wednesday to make it easier for banks under financial duress to access cash in a coordinated effort to unfreeze a global credit crisis and reduce chances of a U.S. recession.

Wednesday's action came a day after the Fed cut its benchmark rate for inter-bank lending by one-quarter percentage point to 4.25 percent in another move to ease credit markets.

The efforts, however, are distorting the setting of prices, a primary function of capital markets, said investors at this week's Reuters Investment Outlook 2008 Summit in New York.

Recessions can have a positive "cleansing" effect, said Tom Metzold, a portfolio manager who oversees $8 billion in municipal bonds at Eaton Vance Corp.

"It is frustrating because I really believe in letting the free market economy cleanse itself and we're not letting it happen," Metzold said. "It seems like you can't fail any more."

At the crux of the credit crisis are complex derivatives that packaged together thousands of U.S. home loans, including subprime mortgages, into securities known as collateralized debt obligations, or CDOs.

Many banks and institutions hold CDOs that were worth hundreds of billions of dollars when they were sold but are now worth a fraction of their initial price.  Continued...