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The Fed uses Wall Street 'shock' as cover for deregulation

by Magnifico
Mon Sep 15th, 2008 at 03:46:59 PM EST

The Financial Times first reported in news that Wall Street banks are fighting for life early this morning that the U.S. Federal Reserve was making "it easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral."

The Fed likely figured the shock of bank failure today was an excellent time to sneak in a regulatory change. The Fed "widened the set of assets eligible as collateral for loans of Treasuries to include all investment grade paper, and raised the size of these Treasury loans to $200bn."

The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.

The NY Times reports that the Fed loosens standards on emergency loans. Not just loosen, but "dramatically loosen" their standards.

In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets -- including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages -- in exchange for emergency loans through the Primary Dealer Credit Facility.
The Fed created the emergency loan program in March, at the same time that it engineered the shotgun marriage of Bear Stearns by JPMorgan. In itself, the program marked a historic expansion of the Fed's lending to cover investment banks rather than only commercial banks.

Under cover of the turmoil on Wall Street as a major investment bank declared bankruptcy and another investment bank was purchased by a consumer bank, the Fed is, once again, changing America's financial flight plan while most people are distracted, looking at the burning wreckage of failed investment banks.

As I suspected back in March, the Bush administration and Federal Reserve are going to try to use the shock of the collapsing economy to quickly deregulate the entire economy to make it easier to loot.

So what will the Federal Reserve now allow as collateral?

Before the Fed's announcement on Sunday, investment banks could pledge as collateral any kind of "investment grade" debt securities, which meant securities rated BBB or higher and included many securities backed by subprime mortgages.
But with the new announcement, the Fed will accept stocks and some debt that has junk-bond status and some securities that may have few real buyers.

More deregulation! Welcome to the world of "high-risk collateral"! About 15 percent of a bank's collateral now can be in equities and debt "below investment-grade".

So does this new loosening done by Bush's Treasury Secretary Henry Paulson and Federal Reserve chairmen Ben Bernanke do for us? In exchange for Wall Street to cover its own risks, they are "potentially putting more taxpayer money at risk."

The public statements about getting tougher with suspect banking and their calls for more regulation seem to be just a clever smokescreen to give them cover to do exactly the opposite — use economic shock to sneak in more deregulation that creates more taxpayer money available for corporate looting.

In the end, the government succeeded in getting Wall Street to create its own insurance policy. But at the same time, the Fed, in agreeing to loosen terms under which it lends money to firms, is potentially putting more taxpayer money at risk.
The events over a harrowing weekend indicate that top officials at the Federal Reserve and at the Treasury will take a harder line on providing government support to troubled institutions. But that does not mean they are unwilling to provide indirect help, or even relax regulatory requirements temporarily.

So, by getting Wall Street to agree to spend bad money on bad investments, the Federal Reserve is put more of our good money to shore up their bad investments. Wall Street upheaval! Time for deregulation.

I'm not an economist. I'm not a professional investor. So this is just my read, but it sure seems like shock doctrine at work, once again.

^{Cross-posted from Docudharma.}

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The Fed uses Wall Street 'shock' as cover for deregulation | 40 comments (40 topical, 0 editorial, 0 hidden)

Re: The Fed uses Wall Street 'shock' as cover for (none / 1)

The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.

Where does that leave the FDIC?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 04:13:03 PM EST

FDIC (4.00 / 2)

Good question.

I don't know the answer, but I suspect that the FDIC (and ultimately the taxpayer) is on the hook for the collateral if the failure of the investment bank takes the parent bank down as well. According to the Congressional Budget Office's most recent report on "The Budget and Economic Outlook: An Update", the FDIC already has paid out $18 billion.

With the number and size of failed financial institutions up sharply this year, CBO expects federal outlays for deposit insurance to rise by more than $15 billion. As of July 2008, the FDIC had spent about $18 billion to cover the insured deposits of insolvent institutions.

This move by the Fed could make that number much larger.

by Magnifico on Mon Sep 15th, 2008 at 04:21:24 PM EST
[ Parent ]

A bit more regarding the FDIC (4.00 / 2)

From "Are Your Bank Deposits Safe? Not Exactly" from Clusterstock.

But Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.
That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.
In addition, the recent spike in number of banks on the FDIC's "troubled list" is only through June, meaning even that inflated number understates the problem.

That spike is 117 banks, up from 90.

by Magnifico on Mon Sep 15th, 2008 at 04:28:12 PM EST
[ Parent ]

Re: FDIC (none / 1)

It is as though the Fed has announced that it is taking in dirty laundry, including crap filled shorts. No shortage of those today. A lot depends on how much can be cleaned up sufficiently to have any value.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Mon Sep 15th, 2008 at 10:46:21 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 2)

Where does that leave the FDIC?

Under water.

On the bright side, the FDIC is going to be under water anyway, so arguably this does not matter.

by Gaianne on Tue Sep 16th, 2008 at 12:27:05 AM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover for (none / 0)

I love it.

And Cramer was telling people to buy NASDAQ last night.

BOOYAH, JIM!

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Mon Sep 15th, 2008 at 04:46:35 PM EST

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 5)

So I'm sitting here and thinking that this may stop the current round of collapse, but does it really affect the underlying fundamentals of the situation? all I see is this pushing the collapse a few months down the line till the next time banks have to report their financial situation. Could it be seen as a desperate political punt till past the election?

Life should consist in at least fifty percent pure waste of time, and the rest doing what you please.

by ceebs (bunchofwankers (at) gmail (dot) com) on Mon Sep 15th, 2008 at 04:50:18 PM EST

Punt! (none / 1)

Could it be seen as a desperate political punt till past the election?

Well the "surge" in Iraq was such a punt.

by Magnifico on Mon Sep 15th, 2008 at 04:54:01 PM EST
[ Parent ]

Re: Punt! (none / 1)

but would the finance organisations see it as being that much in their interests to play it so the results of their mismanagement were investigated under the next government rather than this one?

Life should consist in at least fifty percent pure waste of time, and the rest doing what you please.

by ceebs (bunchofwankers (at) gmail (dot) com) on Mon Sep 15th, 2008 at 05:13:01 PM EST
[ Parent ]

Reasons for delay (4.00 / 2)

Absolutely yes... if they get the right people into power that favor more deregulation, then more wealth can be extracted from Americans. The next government could be very favorable — ala John McCain.

by Magnifico on Mon Sep 15th, 2008 at 05:19:48 PM EST
[ Parent ]

Re: Reasons for delay (none / 1)

but if the wrong people get into power then you'd want to keep the juggled plates in the air for as long as possible so they can be blamed.

Life should consist in at least fifty percent pure waste of time, and the rest doing what you please.

by ceebs (bunchofwankers (at) gmail (dot) com) on Mon Sep 15th, 2008 at 07:27:38 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 3)

I don't think they can really punt anymore. It won't impact public perceptions after tonight. The top stories on the nightly newscasts will be Wall Street's collapse. The front page of every paper in the country tomorrow morning will be the same.

Add to that the fact that the public already believes we're in recession (and a growing percentage believe we're in a depression).

Punts are nice. Eventually they get blocked.

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Mon Sep 15th, 2008 at 04:55:55 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 3)

Maybe 30% of the population doesn't understand that the Right is responsible for this fiasco. A hard core of 10% will be convinced the Dems did it, and that Obama will make it worse.

So as an election punt, this is only marginally useful.

It's only a matter of time before queues start forming outside banks across the US as people try to take their money out.

Soon after that, the US will default on a payment to foreign creditors - most likely the Chinese.

After that, it gets lively.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 15th, 2008 at 05:10:42 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 5)

Quite the contrary, this could be a critical flashpoint that refocuses the public on the key issue -- the economy -- after weeks of bullshit. If the election is fought on the economy, we win. (Obama runs up landslide margins on that when the public is focused.) If it's fought as an idiotic referendum on Doubts About Obama^TM, we might lose.

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Mon Sep 15th, 2008 at 05:42:10 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (none / 1)

I agree that the economy is a winner for the Dems. The question is if Obama can bring himself to sum up the situation in a couple of memorable statements and drive them home. I am getting really sick and tired of his inability or unwillingness to do that.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Mon Sep 15th, 2008 at 10:39:14 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (none / 1)

The bit he did yesterday on "the pain finally trickling up" was very good. His new ad this morning is better as well. He may be starting to get into the zone on the stump.

Give it a day or two for them to find the rhythm, but they're off to a good start.

Biden's doing all the morning shows today, and you know how the press adores him. He's been pretty sharp on the stump the last few days, too.

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Tue Sep 16th, 2008 at 08:10:07 AM EST
[ Parent ]

This is where the printing pressess (4.00 / 3)

come in.

The US will not default to the Chinese.

Rather, the Federal Reserve will loan money--lots of money--to the US Treasury to make good on all those Chinese-held US Treasury Bills that are coming due.

This is the way of hyper-inflation. There is no way to avoid it--none at all.

Oh, yes: There is the middle way. The Chinese accept special favors and considerations in exchange for slowing the rate of collapse. Essentially this means transfering title to real properties and goods.

The end is the same.

ALL of this paper will burn.

by Gaianne on Tue Sep 16th, 2008 at 12:39:24 AM EST
[ Parent ]

Re: This is where the printing pressess (none / 1)

I think we'll avoid hyper-inflation, but serious debasing, sure.

you are the media you consume.

by MillMan (millguy at gmail) on Tue Sep 16th, 2008 at 12:47:45 AM EST
[ Parent ]

Re: This is where the printing pressess (none / 1)

All we can do at this point is place our bets.

But not in dollars! ;)

by Gaianne on Tue Sep 16th, 2008 at 12:58:28 AM EST
[ Parent ]

Re: This is where the printing pressess (4.00 / 3)

Gaianne:

This is the way of hyper-inflation. There is no way to avoid it--none at all.
Oh, yes: There is the middle way. The Chinese accept special favors and considerations in exchange for slowing the rate of collapse. Essentially this means transfering title to real properties and goods.

This is connected to the current "New Dark Age" thread....

Do not think that the Chinese would ever proceed unilaterally where others have an interest. It's only in Africa where they tend to act unilaterally (because no one else will venture in). When they do, they often alienate the locals just as much as the US, the difference being that, unlike the US, they do seem to learn from their mistakes....

I think that the

Shanghai Cooperation Organisation

and other regional groups will see increasing "economic co-operation" - in particular, and agreed stance on dealing with the evolving crisis as it spills over.

I do not see the Chinese etc expecting actual title to and/or control of US property, whether "Real" or "Intellectual", any more than they are willing to give that up to foreigners themselves.

Revenues produced by such "Property" are another matter, and a perfectly legitimate object of investment with the right investment mechanisms - but my point there - which I make ad nauseam, I know - is that neither of the conventional forms of "Finance Capital" - secured debt and "the Corporation" - are that mechanism.

A global settlement - Bretton Woods 2 - between the US and its creditors is inevitable, and it can only be achieved if it is perceived to be fair to both sides.

That is IMHO possible, but not within the existing "Anglo Disease" paradigm.

by ChrisCook (cojockathotmaildotcom) on Tue Sep 16th, 2008 at 06:58:13 AM EST
[ Parent ]

Re: This is where the printing pressess (none / 1)

Hell, the feds bailed out the Chinese and the Japanese with Phonie and Frauddie. Who do you think held all the damned bonds?

What I'm curious about is the potential interaction between that event -- protecting the Asians holding the GSEs' debt -- and the federal government's ability to borrow. Was bailing out Phonie and Frauddie more about protecting our credit rating than anything else?

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Tue Sep 16th, 2008 at 08:16:42 AM EST
[ Parent ]

Re: This is where the printing pressess (4.00 / 3)

Drew J Jones:

Hell, the feds bailed out the Chinese and the Japanese with Phonie and Frauddie. Who do you think held all the damned bonds?

Bailed them out? That almost sounds like the Fed were doing them a favour!

I think the Fed had no option for two reasons.

Firstly, consider how dang furriners owning large foreclosed swathes of the US might play politically, particularly if the dang furriners then took a more enlightened attitude to the hapless mortgagees than US investors do.

Shades of Chavez and his cheap heating oil....

Secondly, the dollar would collapse at warp speed as the dang furriners pull out from their dollar investments.

by ChrisCook (cojockathotmaildotcom) on Tue Sep 16th, 2008 at 09:54:01 AM EST
[ Parent ]

Re: This is where the printing pressess (none / 1)

No, I agree. My impression is that they probably had no choice.

Where's your motherf*%&ing flag pin?

by Drew J Jones (blahblahblah@blahblahblah.com) on Tue Sep 16th, 2008 at 10:07:26 AM EST
[ Parent ]

Re: This is where the printing pressess (none / 1)

Sure. There appears to be a single criterion for US government action - who is going to suffer the most as these financial units go down, and can those sufferers hurt us in the short term? If they can't hurt us, then screw 'em.

You can't be me, I'm taken

by Sven Triloqvist on Tue Sep 16th, 2008 at 11:13:53 AM EST
[ Parent ]

Re: This is where the printing pressess (none / 0)

Who do you think held all the damned bonds?

Chinese have presumably unloaded some of their exposure to bond- and dollar-value risk via long-term contracts for African and Central Asian resources. Is there any way to get a handle on how much?

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Wed Sep 17th, 2008 at 02:21:47 AM EST
[ Parent ]

Re: This is where the printing pressess (4.00 / 3)

The US will not default to the Chinese.
Rather, the Federal Reserve will loan money--lots of money--to the US Treasury to make good on all those Chinese-held US Treasury Bills that are coming due.
This is the way of hyper-inflation. There is no way to avoid it--none at all.

Inflation is just another word for default, in this case. Inflation = dollar falling = assets held by the Chinese losign their value.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Wed Sep 17th, 2008 at 06:45:41 AM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 4)

The only way I can really see a punt working is if they Arrest a few people at a senior level, on the lines of their usual "A few bad apples rather than the whole bartrel being rotten" play

Stalinist Financial showtrials anyone?

Life should consist in at least fifty percent pure waste of time, and the rest doing what you please.

by ceebs (bunchofwankers (at) gmail (dot) com) on Mon Sep 15th, 2008 at 05:15:57 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (4.00 / 4)

Not time for trials before the election. The best they could do is have a few "perp" walks.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Mon Sep 15th, 2008 at 10:40:22 PM EST
[ Parent ]

Re: The Fed uses Wall Street 'shock' as cover (none / 0)

There's always time for a summary execution or a lynching.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Sep 16th, 2008 at 11:33:44 AM EST
[ Parent ]

Self-lending? (4.00 / 2)

Speaking of regulation, is a company lending money (20 billion $ to be exact) to itself considered normal? Isn't it somehow... paradoxical?

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Mon Sep 15th, 2008 at 06:56:20 PM EST

Re: Self-lending? (4.00 / 4)

Heard on a radio station that thelaw is written that way so that one section that takes in investors cash cant then lend it to another section that fails using one class of investors cash to pay off the companies debts, andthen using government guarantees to pay off the investors. In effect robbing the taxpayer in a scheme that if you deployed it against anyone else would be called fraud.

Not seen or heard it mentioned in this way anywhere else so dont know if its true (Plus my technical financial knowledge could be written onto the back of a postage stamp, so it could be complete rubbish)

Life should consist in at least fifty percent pure waste of time, and the rest doing what you please.

by ceebs (bunchofwankers (at) gmail (dot) com) on Mon Sep 15th, 2008 at 07:26:17 PM EST
[ Parent ]

Re: Self-lending? (4.00 / 4)

Those who should be worried are those who rely on AIG to pay up on insurance claims. Not a good time to have a big claim.

If sanity be culturally normative, then by the norms of this culture I claim insanity.

by ARGeezer (argeezer a in a circle yahoo dot com) on Mon Sep 15th, 2008 at 10:43:12 PM EST
[ Parent ]

Re: Self-lending? (none / 1)

Reinsurers should be having a fit.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Sep 16th, 2008 at 11:32:35 AM EST
[ Parent ]

Re: Self-lending? (4.00 / 2)

'ordinary' savings are covered by government insurance (or federal in the case of the US). But note that the funds to cover such insurance are limited, and certainly insufficient for meltdown.

What has just happened in the States, is that a rule that prevented, say investment arms from touching the funds of a savings bank in the same corporate 'family', has just been suspended. The investment arm is thus borrowing insured funds, and if they can't repay....once again the taxpayer loses.

I'm happy (at present) that the Finnish commercial banking system is highly conservative. And historical interest in exotics has been minimal.

You can't be me, I'm taken

by Sven Triloqvist on Tue Sep 16th, 2008 at 11:22:33 AM EST
[ Parent ]

Re: Self-lending? (4.00 / 2)

What has just happened in the States, is that a rule that prevented, say investment arms from touching the funds of a savings bank in the same corporate 'family', has just been suspended.

That sort of logically follows from the repeal of Glass-Steagall 10 years ago. it's just that it's taken 10 years for them to get to scraping the bottom of the cookie jar.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Sep 16th, 2008 at 11:31:05 AM EST
[ Parent ]

Re: Self-lending? (none / 0)

I'm not completely sure about this Glass-Steagal talk. We (us Swedes) have never had that kind of legislation (as far as I know), and when we have had financial crashes it has been due to other things.

I think the Glass-Steagal argument might almost be used as a cover for the more fundamental Anglo disease issues.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Thu Sep 18th, 2008 at 05:25:20 PM EST
[ Parent ]

Re: Self-lending? (none / 1)

Well, Glass-Steagall was introduced as a result of the Crash of 29. It was perceived then that it would prevent a repeat. 10 years after they repealed it, here we are.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Thu Sep 18th, 2008 at 05:43:48 PM EST
[ Parent ]

The Fed uses Wall Street 'shock' as cover (4.00 / 4)

So much for pushing out "the beginning of the end" until after the election.

you are the media you consume.

by MillMan (millguy at gmail) on Tue Sep 16th, 2008 at 12:48:42 AM EST

c'mon, this is (4.00 / 5)

hysterical ...

All hail the heroic proletarian leadership of Comrades Paulson and Bernanke! All hail the September Revolution! Their brilliant plan for reversing the historically aburd triumph of capitalism over the dialetical principles of Marx and Lenin has now achieved complete success.
Think of it comrades: We have seized the commanding heights of the international capitalist financial system -- in a bloodless coup!
Through our National Mortgage Soviet, we can control the US housing market for decades to come.
With our new Global Insurance Soviet, we can throttle the lickspittle financiers and bring their decadent bourgouis derivatives markets to heel.
By accepting common shares as collateral for loans from our People's Federal Reserve Bank, we can accumulate ownership stakes in the remaining White corporations, weakening their will to resist the inevitable victory of the party and the workers' state.
Once Comrade Obama has been installed in the White House, fortified by the achievements of Comrades Paulson and Bernanke, supported by our Chamber of People's Deputies and our Supreme Soviet Senate, and ruthlessly exercising the dictatorial powers accumulated by Comrade Bush, final victory will be certain.
If only Comrades Stalin and Mao were alive to see this glorious day.
Comrade Principle | 09.16.08 - 9:51 pm | #

Diversity is the key to economic and political evolution.

by MarketTrustee (pbing@estudioinc.com) on Wed Sep 17th, 2008 at 08:44:37 AM EST

Re: c'mon, this is (4.00 / 4)

This is what sent off to my CO senator:
Comrade Allard !
Well, you've certainly presided over a socialist revolution haven't you ? With the nationalization of Fannie Mae and Freddie Mac, the government now owns 50% of the existing home mortgages and 80% of new ones.
With the nationalization of AIG today, the government is now the largest commercial insurer, the largest home insurer, the largest auto insurer, the largest retirement funds manager, the largest aircraft leaser - the list goes on and on.
Not bad going for a Republican.
Long live the United Socialist States of America !
Sincerely,
XXXXXXXXX

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Thu Sep 18th, 2008 at 05:29:09 PM EST
[ Parent ]

The Fed uses Wall Street 'shock' as cover for deregulation | 40 comments (40 topical, 0 editorial, 0 hidden)

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