With all eyes on the major public institutions, Fed slips in some drastic measures!
Those who want to continue to grasp the whole of the macroeceonmic picture we face, must keep up to date on all of these FED actions, the various facilities, how they operate, etc. I find what the FED did this weekend, which might be seen as being in lieu of a Lehman bailout, quite extraordinary. The Term Securities Lending Facility has been increased to $200 billion and will now be held every week instead of every other week.
More importantly, they are accepting increasingly crappy assets as collateral for these weekly loans (which through the fairly automated roll-over process become effectively long-term loans). Now any paper asset that receives an "investment-grade" rating from the rating agencies will be accepted as collateral, whereas previously they were limited to Treasuries, agency debt, and AAA asset-backed securities. Now, we all know how much faith we can have in the ratings from these agencies... ZERO!
So... if the Fed is exchanging fresh dollars for crap, the simple interpretation is that the common stock of the USD is rapidly turning into crap. I heard some statistics last night on CNBC that blew my mind, relating to the total assets of the FED and what portion of that sum has already been spoken for with the present crisis. I will look for confirmation of the nu8mbers from a printed source before blogging any stats. It's staggering... the FED is quickly running out of bullets not only with respect to having nowhere to go with interest rates, but also in terms of not having the capital to be able to make any difference in what transpires from here forward. Don't forget what the FED is ... a consortium of banks.
I believe the most significant news out of the FED this weekend involves the suspension of rules relating to tri-party repos through January 2009. This portion of the press release, which is copied below, reads like some sort of innocuous add-on, but I think it's the most substantial action. Tri-party repos are at the heart of how securitization of mortgages is achieved, and the loss of Lehman clearly created worries for the FED about how thie market would function... just as it did during the Bear Stearns debacle. BoNY and JPM are the major clearing houses for tri-party repos, with BoNY alone clearing $1.5 trillion PER DAY!!!!! Interestingly, while the member banks that comprise the federal reserve system are not a matter of public record, which are instead presented to the public as regional federal reserve banks, those two old stalwarts are almost universally presumed to count among their ranks. The exception to the Federal Reserve Act invoked this weekend permits banks to provide liquidity to their affiliates in exchange for assets typically funded in the tri-party repo market. This is essentially a bailout of JPM and BoNY in my opinion... not through the direct injection of liquidity from the FED, but taking the form of relaxed regulation that permits these clearing houses to A.) borrow cash from the FED at the begging window, and B.) funnel that cash down into subsidiaries as needed, while assets taken in return for that cash are going to further widen the gap between the reported assets of these institutions and their ultimate, incalculably-low market value.
Please... Fools... I have seen posts from some saying this is a time to go bargain hunting for banks... please do not fall into this trap. Pay attention to the macroeconomic landscape ... it is a dire situation indeed.
The FED is not your friend, but their websites, and the insight they provide into what they're up to... that information is your friend!
The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities.
"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."
"We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Chairman Bernanke said.
The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.
The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.
These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.
Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion, from a total of $125 billion. Amounts offered in Schedule 1 auctions will remain at a total of $50 billion. Thus, the total amount offered in the TSLF program will rise to $200 billion from $175 billion.
The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.