Monday, March 17, 2008
For the first time securities dealers, effective today and for at least the next six months, may borrow from the Fed on much the same terms as banks. The Fed also lowered the rate charged on such borrowings from what's known as its discount window by a quarter of a percentage point, to 3.25%, and extended the maximum term to 90 days from 30.
It took a unanimous vote by the Fed's five governors yesterday to invoke a Depression-era clause in the Federal Reserve Act to waive the usual prohibition on Fed loans to nonbanks.
Last Tuesday, it announced what Wall Street called its most creative initiative yet: It lent up to $200 billion of its much-sought Treasurys to investment banks starting March 27 in return for a like amount of now-shunned mortgage backed securities for up to 28 days. The announcement led to a huge rally in stocks. But within days dealers were telling the Fed it didn't go far enough. They wanted longer term, more immediate funding against a broader range of collateral.
And the Fed complied.
Is this "insider borrowing" similar to "insider trading"? What disclosures will - should - be provided by the borrowers?
Can the FED itself fail? If the FED keeps all of these carpetbaggers afloat with dubious loans, what happens when the waterlogged snake-oil salesman finally begin to sink after 90-days? Do they thrash about for another extension of the discount window up to 6 months? How long can they cling the FEDs apron strings? I have no sense of how long such temporizing can persist and whether there is any threat to the Federal Reserve?