For a long time, I have been worried about how many companies were borrowing money to buy back their own shares. So I enjoyed this fake letter/rant immensely.

Most people have strong feelings about Jim Cramer. Anyone who does not love him usually winds up hating him. We basically belong to latter category.

So why are we making one of this blowhard’s columns into this week’s essay of the week?

Believe us, we did not want to. But we wanted an essay that would clearly explain why everything is suddenly going boom now in the debt markets. And as much as we hate to admit it, Cramer has the clearest and most believable explanation currently out there. So we bit the bullet and made his column essay of the week.

Now we got to say that this column has all the usual Cramer sins. It is self promoting (for this reason we recommend that you skip the first page). It is has a ridiculous conclusion (so we recommended that you skip the last page). But if you start at the second page you will get clear and concise explanations for why the financial markets have suddenly stoped working.

Believe us, if we could have found a better explanation, we would have used it.

And this is how they do it (from Der Spiegel)….

The saviors of the German financial sector came together early this month in a sterile conference room at the Düsseldorf headquarters of the IKB commercial bank. The head of Germany’s state development bank KfW, Ingrid Matthäus-Maier, looked anxious. Jörg Asmussen, a departmental head at the Finance Ministry, wrung his hands. His boss, Finance Minister Peer Steinbrück, called from his home in Bonn; other top leaders of German banks were also listening in.

Germany had been hit by a version of the crisis that surprised French investors on Thursday, sending stock markets from New York to Tokyo into unexpected dives. Debts arising from America’s so-called subprime mortgage sector had just caused IKB to falter.

The most thankless job fell to Matthäus-Maier. She had to tell those in attendance that KfW’s stake in IKB was in an unforeseen predicament. The niche bank specializes in the rather dull sector of financing mid-sized companies; but recently it had taken on risky investments in the United States. The bank’s management made some bad bets, and lost. Now it was teetering on the edge of insolvency, unless other German financial institutions chipped in with emergency funding.

Jochen Sanio, president of Germany’s banking supervisory agency BaFin, was pessimistic: If IKB folded, the failure might spread to other institutions, and maybe set off the biggest bank crisis since the Great Depression in the 1930s. Bundesbank President Axel Weber was less bleak, but made another troubling prediction: A chain reaction could endanger Germany’s banking reputation. The gathering of bankers and government officials decided to undertake the biggest rescue operation for a single bank that Germany has ever seen.

How come in real life the bad guys always win? While you are pondering those mysteries of life, read these stories…..

Central banks’ aggressive moves stun markets from the Financial Times. Short quote….

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The European Central Bank stunned markets on Thursday with its aggressive intervention to quash a brewing liquidity crisis in European financial markets.

The ECB move far exceeded in scale and scope the relatively modest steps taken by the Federal Reserve to sustain adequate liquidity in US markets.

After noting a sharp rise in overnight interest rates to 4.7 per cent – far above the target 4 per cent – the ECB put out a statement in the morning saying it stood “ready to assure orderly conditions in the euro money market”.

Within a couple of hours it acted: taking the unprecedented step of offering a pre-announced unlimited tender so that European banks could get as much cash as they wanted.

The last time it stepped in to provide large-scale liquidity in response to market concerns was in the aftermath of the September 11 terrorist attacks. But even then, it did not offer unlimited support.

Equally striking was the amount of money the 49 banks that took up the tender received: €94.8bn ($129bn). This was far above the €69bn banks took on September 12 and the €40bn the next day. By contrast, the Federal Reserve – which also saw overnight rates move up to above 5.75 per cent, compared with its target rate of 5.25 per cent – took less drastic action to support liquidity.

Central banks take emergency credit crunch action from the Times. Short quote from the article…

The Fed said that it would provide $12 billion of temporary reserves to the American banking system through 14-day security repurchase agreements. That was more than double the $5 billion of temporary reserves added through such “repo” agreements last Thursday.

In London, a spokeswoman for the Bank of England said that it had not intervened in markets as of lunchtime.

The disruption to markets in Europe was triggered after BNP Paribas, the French bank, announced the closure of three of its asset-backed credit funds, blaming a drying up of credit. BNP said that it was suspending trading in its Parvest Dynamic ABS, BNP ABS Euribor, and BNP Paribas ABS Eonia funds after the “complete evaporation” of market liquidity.

The German Bundesbank also denied that it was holding emergency talks to discuss problems at West LB, the government-controlled state bank.

The ECB’s intervention came just as its latest monthly bulletin sought to play down fears over a credit crunch, emphasising that “overall financing conditions remain favourable, money and credit conditions vigorous, and liquidity ample”.

A “Significant Liquidity Event” from the Economist’s View. This is a good explanation of what went on today in economic terms. Here is a quote….

If the Fed did not respond, the ff-rate would begin rising, potentially even reaching the discount rate. To avoid this, and maintain a federal funds rate of 5.25%, the “Federal Reserve subsequently poured a little more cash than usual into the U.S. banking system in order to deal with demand spilling over from Europe.” The total amount of the injection was $24 billion, and this is represented by the shift in the supply of reserves indexed by (b) in the diagram. The result is a new equilibrium at E2 where reserves have been increased to accomodate the increase in demand, and the ff-rate is at 5.25%. once again.

If you can’t understand the above read the whole post.

In addition to the links above, there is this post and this post over at calculated risk. But you already read both of those posts right?

Most people refer to this as China threatening to use the ‘nuclear option’ of dollar sales. Here is a quote to get you started…..

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning – for the first time – that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Read the rest here.