Sunday, August 26, 2007

Just Making It Up As We Go

This is what makes America great...her ability to make up new rules whenever the old rules become inconvenient. God bless America and may all the loser/armpit nations of the world follow our great and glorious lead.
In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed's web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed's discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.

3 Comments:

Blogger Circus Act said...

It seems to me that the Fed had a golden opportunity to stop being the "enabler" in this mortgage backed securities (MBS) fiasco and punted it away.

The biggest problem facing any institution/investor holding an MBS instrument right now is that an MBS is extremely difficult to value since there are no buyers for them and the ability of mortgage holders to continue to pay for depreciating assets is so uncertain.

Instead of relaxing the lending rule, wouldn't it have made more sense for the Fed to tell the banking arms of BofA and Citi to lend to each other's brokerage arms? The third party due diligence would have quickly removed the curtains hiding the toxic waste in both banks' brokerage portfolios. The Fed has essentially allowed both banks to use good money to hide the growing losses at their brokerages. If they had to borrow from each other to bail out their brokerages, the ponzi scheme would have to end.

This is on par with telling an FB with negative equity that they can pay interest only for the next few months to stall foreclosure. The sh@t will still hit the fan since the real issue remains unaddressed.

Aug 27, 2007, 11:44:00 PM  
Blogger Marinite said...

I think all mortgages in the US should be forgiven and paid off by all tax payers and we can then all start over. I can't think of a faster and less painful way to reduce the cost of housing across the board. Can you?

Ok, maybe just a little tongue-in-cheek here.

And circus act, my comment has absolutely nothing to do with your insightful one. I just thought I'd try to goose this thread about changing the rules a little.

Aug 28, 2007, 7:26:00 PM  
Blogger Frank said...

According to this article:

http://www.financialnews-us.com/?page=ushome&contentid=2448565379

"An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high......the position covers a notional €6.9bn, and potentially even more

Is this the continuous unwinding of yen carry trade or something more vicious? Or is it just a hedge?

Aug 28, 2007, 7:36:00 PM  

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