Cosmetic fix for a structural problem: That led to the Fed's 50 basis point cut in the discount rate on August 17th and the Fed Funds rate on September 18th and October 16th which were intended to c

Cosmetic fix for a structural problem: That led to the Fed's 50 basis point cut in the discount rate on August 17th and the Fed Funds rate on September 18th and October 16th which were intended to create liquidity in the credit markets. But all they did was calm the markets, not create the desired liquidity. Cheap Bobbi Brown Brushes The reasons were three fold: 1) banks hate to borrow from the discount window because the Fed has always been seen as a lender of last resort (read troubled bank); 2) the discount rate remained a 50 basis point premium over the Fed Funds rate; and 3) now that the rating and pricing models for securitized debt had proven to be faulty, the real banks were looking to decrease exposure to the shadow banks, not increase it.Frozen Solid: As subprime mortgage defaults increased and agencies lowered their ratings, investors, banks and funds began looking at all derivative backed paper with suspicion, refusing to accept it as collateral for the short-term commercial paper that provides liquidity to today's money markets. It is estimated that 53% of $2.2 trillion US commercial paper is now backed by assets, and 50% of the assets are CDOs.Mac Lipstick That is over $500 billion in commercial paper backed by CDOs. As of November 2nd collateralized commercial paper had declined for 11 straight weeks in an amount totaling $300 billion or 25% from the amount outstanding at the end of July. Further, as much as $300 billion in leveraged finance loans were "orphaned" because they could not be sold or used as collateral (which means they have to be held in portfolio on the lender's balance sheet).Best Mac Concealer Large segments of the credit markets were frozen solid.Now what: We know how much securitized debt the public institutions hold on their balance sheets, and it amounts to many billions of dollars.