Is the Fed Propping Up Wall Street?

Buried in the financial news today was this startling tidbit:

Reuters
Investment banks are borrowing from Fed
Wednesday March 19, 12:12 pm ET

NEW YORK (Reuters) - Investment banks Goldman Sachs Group Inc (NYSE:GS - News), Lehman Brothers Holdings Inc (NYSE:LEH - News) and Morgan Stanley (NYSE:MS - News) are testing a new program that allows investment banks to borrow directly from the Federal Reserve, according to people at the banks.

My first thought: how do I get my own private access to this Federal ATM?

The story continues:

In a bid to stabilize jittery markets, the Fed said on Sunday that it would allow investment banks to borrow from its discount window using a wide range of investment-grade securities as collateral.

(snip)

The Fed has also cut the rate at which dealers borrow at the discount window to 2.5 percent from 3.5 percent, in two separate actions this week.

Goldman Sachs plans to test the program sometime this week, a spokesman said. Morgan Stanley Chief Financial Officer Colm Kelleher said his bank has already tested the program, and a spokeswoman for Lehman said the investment bank has also done so.

Erin Callan, CFO at Lehman Brothers Holdings Inc (NYSE:LEH - News), said in a conference call on Tuesday that dealers can borrow from the discount window at attractive terms.

"We would expect that the dealer community will actively begin to access the new program," Callan said. The program is a statement of confidence to parties that trade with and finance Lehman, and will also allow Lehman to fund more business with clients, she added.

In August, when commercial paper markets were seizing up, the Fed cut the discount rate for commercial banks. Soon after that, the four largest U.S. banks and a major international bank borrowed more than $2 billion total at the discount window, to help remove the stigma of getting short-term financing from the central bank.

That was nice of them. Wouldn't want anyone on Wall Street to have to earn their money.

Yes folks, that's your tax dollars at work, propping up investment banks some of which (like Lehman Bros.) are rumored to be in as dire straits as Bear Stearns was before it was sold for peanuts to JPM.

After Monday's scare, the Fed (and God knows what related shadow outfits) appear to have gone into full damage-control mode:

Markets Brief
Visa Debuts Public Trading In Unsteady Climate
Camilla Webster, 03.19.08, 9:19 AM ET

A Fed rate cut, a 400-point gain on the Dow, the largest IPO in U.S. history and strong earnings from the battered financial sector could have investors ready to snap up a basket of stocks this Easter week. But some traders surmise that Tuesday was a one-day rally party.

Now the VISA IPO struck me as really weird timing, to put it mildly: why would a company, a CREDIT card company of all things, choose to go public the day after one of the most wild rides in recent market history? Would not their execs have chosen to delay the IPO for fear of debuting during a crash or substantial fall?
Who tipped them off that the markets would stabalize less than 24 hours after the chaos on Monday? Either way, is it not an amazing PR coup for Wall Street that its largest IPO ever occurred in such a climate? Sure makes me wonder what back room deals were being struck to make it all happen without a hitch. Just saying.

Meanwhile, now that the nation's biggest investment banks are feeding at the trough of the Federal Reserve, and now that billions upon billions has been siphoned off into war profiteering contractors and companies in Iraq, can we call American now for what it so obviously is: a corporate welfare state? Just saying.

•  tips

  to get Wall Street Fat Cats off the Government dole. They're blowing our taxpayer money like it's going out of style.

  by gnat on Wed Mar 19, 2008 at 09:26:00 PM PDT

•  Answer: Yes.

  Seriously, though, gnat, nice diary.

  by srkp23 on Wed Mar 19, 2008 at 09:27:46 PM PDT

  •  thanks

    glad you liked it. Future historians will look back at our present age of robber barons and plutocratic excess and be simply aghast. This cannot possibly last.

    by gnat on Wed Mar 19, 2008 at 09:31:49 PM PDT

•  we have become

  a government for the corporations, by the corporations.

  by FireCrow on Wed Mar 19, 2008 at 09:28:10 PM PDT

  •  well at least Bush has his priorities straight

    today he took time out to sell weapons to Kosovo in order to "strengthen the security of the United States and promote world peace."

    by gnat on Wed Mar 19, 2008 at 10:00:21 PM PDT

•  this is nothing compared to what's coming...

  I've been doing some serious research in the last week about the financial markets and what I have found is truly terrifying. I'm going to post a diary in the next few days about this disaster as soon as I can pull all the sources together. You bet the Fed is propping up Wall Street and this time it's not going to work. Hold on to your hats, folks - this is going to be a VERY bumpy ride.

  by Eyz on Wed Mar 19, 2008 at 09:42:54 PM PDT

  •  all too true

    by November, we won't be talking about Wright, or Iraq, or Hillary's tax returns......it will be about the new Great Depression.

    by virtualobserver on Wed Mar 19, 2008 at 09:44:41 PM PDT

    •  http://theautomaticearth.blogspot.com

      The subject says it all - lucid review of the daily news. It ain't good, not good at all.

      by Stranded Wind on Wed Mar 19, 2008 at 11:43:04 PM PDT

  •  here are some recent links

    to help aid your research:

    Foreign investors veto Fed rescue

    The Invisible Fist of the Free Market

    Is Anyone In Charge?

    The Buck Stops Where?

    by gnat on Wed Mar 19, 2008 at 09:57:48 PM PDT

•  Yes.

  I heard it compared to what Nixon did in the early '70s, which came right before a recession and massive inflation.

  And this came from David Frum, of all people- former Bush speech writer.

  As much as NPR can get on my nerves, the still have some good stuff. Even from a Republican from the AEI!

  by Poika on Wed Mar 19, 2008 at 09:44:35 PM PDT

•  Yes

  the recent "growth" is really more about the dollar weakening.  Dollar goes down = DOW goes up (or stays the same if the value of the stock goes down).  12000 DOW is really more like 8000 when you factor in value of dollar.

  by foxsucks81 on Wed Mar 19, 2008 at 09:49:47 PM PDT

  •  and China

    has been propping up  the dollar for some time now.

    by gnat on Wed Mar 19, 2008 at 10:26:39 PM PDT

•  we have systematically eroded

  the few checks and balances that were in place to protect us from speculative financial bubbles like the one we now find ourselves in. After the S&L crisis, after the dot com bubble, after Enron, the financial market is as unregulated, and we are as exposed, as ever.

  by gnat on Wed Mar 19, 2008 at 09:54:28 PM PDT

  •  Corruption

    Just as we have seen the systemic erosion of our democratic checks and balances which are suppose to protect our freedom.

    Power has corrupted absolutely our economic and political elite.

    by Jagger on Wed Mar 19, 2008 at 11:18:28 PM PDT

•  Seriously...they were trying to prevent...

  successfully I might add a 1929 style global run on the banks and investment companies that could literally crash the whole world into a severe Depression...is that what you want to happen?

  by dvogel001 on Wed Mar 19, 2008 at 10:01:41 PM PDT

  •  no, but unaided by vigorous financial reform

    just opening up the Fed to the investment banks is a short-term fix that may, in fact, make the situation worse.

    by gnat on Wed Mar 19, 2008 at 10:03:57 PM PDT

    •  They facilitated a buyout of a weaker...

      firm by a stronger firm with little or no disruption in the capital markets in the case of Bear Stearns...these Rules were put in place as stop-gap measures during liquidity crisis after the 1929 crash to prevent a new crash...it is precisely the design of the preventative measures

      by dvogel001 on Wed Mar 19, 2008 at 10:10:47 PM PDT

      •  not sure which rules

        you are referring to. From the article linked to in my diary it looks like Bear was not the only firm in trouble, and that the Fed has decided to allow other troubled firms to "borrow" from them in a more discreet: essentially, more hidden from public view. But I'm not convinced this move won't spook the market even more. By the way, I'm all for preventive measures, but there needs to be systematic reform before we can expect the markets to stabalize in the long run. Right now it appears this whole thing could have been prevented if reforms had been put into place several years ago.

        by gnat on Wed Mar 19, 2008 at 10:16:21 PM PDT

        •  The Fed Had No Choice

          W/ Bear it wasn't just a matter of the panic it would have ensued--the problem, as the Economist notes, is really one of entaglements, and Bear was about as entangled as you get. Letting Bear just go into Chapter 11 risks would mean widescale triggering of downgrade-pegged credit defsult swaps, i.e. Bear would've been forced to put up billions, if not trillions of dollars in collateral that it didn't have--that effects more than Bear, its the buyers too, who are know holding essentially worthless security interests. Not to mention in Chapter 11 all of Bear's clients assets would have been frozen pursuant to the automatic stay--this in effect would potentially subsume large swaths of collateral that other financial institutions had placed with Bear. And finally,  Bear basically was the maker for prime brokerage and clearing--in effect its the main facilitator on the street, with its hand into everything. Bailing out Bear in the end probably had nothing to do with Bear itself but with the markets continuing to function.

          Now whether the bailout ought to mark new fed policy is a different question that I don't even pretend to really have the background to know a thing about.

          by mattb25 on Wed Mar 19, 2008 at 10:39:27 PM PDT

          •  I'm not sure I disagree

            the question now though is: where does it stop? The article linked to in my diary indicates the Fed has quietly opened up its "vaults" in such a way that all the big firms will now be "borrowing" money to stay afloat or write off bad loans and bad investments. while this may seem necessary in the short-term, is it wise or even sustainable in the long-term? Part of my diary and the thread it has engendered is simply to ask this question. But part of the aim here is also to make us all want to demand reform of our financial markets so that these asshats on Wall Street don't run our country into the ground like this again.

            by gnat on Wed Mar 19, 2008 at 10:45:10 PM PDT

            •  Oh I agree

              Look it obviously creates an incentive problem if every I-Bank assumes it can borrow directly from the Fed as a bank of last resort. And it implicates the legitimacy of the Fed too, 'cause Lord knows what they're taking as collateral--a whole bunch of opaque derivative products in all likelihood. At the same time, it's addressed not only toward ensuring that a major bank doesn't go down, but also to ensure that it doesn't happen where there may not actually have been a liquidity crisis, as may or may not have been the case with Bear.  It's amazing how talk on the street may have ginned up talk of a liquidity crisis, in turn triggering a run on the bank which in fact caused the liquidity crisis that might not have been there before. So in that sense the perception that the Fed will bail out these banks may be helpful.

              But if this is going to be policy, I agree, it needs big time, sweeping and substantive regulation. Otherwise, as Ignatius notes today--read his column if you haven't already--you really get into the nightmare scenario of what if the fed fails?

              by mattb25 on Wed Mar 19, 2008 at 10:50:51 PM PDT

              •  maybe it would be good to allow

                at least one of these firms, perhaps one of the smaller ones, to fail and not be bailed out. I understand your anxiety about seeing a collective failure or domino effect, but that has to be weighed with the possibility that we are only delaying the inevitable (and that it will be worse then). This whole thing is a little like addressing a badly wounded patient in medicine: do you amputate that limb or try to salvage it? But again I can't emphasize enough that the real crime would be if NO reform came out of this crisis, b/c then we will have failed to learn any lessons about how these surreal speculative bubbles arise in the first place.

                by gnat on Wed Mar 19, 2008 at 10:56:44 PM PDT

                •  I definitely agree with the last point

                  And probably with the first couple to a degree--I think the Fed is just trying to buy time right now to figure out what the hell to do. They're thanking their stars right now that Goldman and Morgan managed to beat expectations and that there hasn't alreay been a run on Lehman. If the overall objective is all about trying to prop up confidence until the Fed can decide on a sensible long term approach, then I think I support it. And while I think regulation needs to be sweeping, I also think it should be incrementally introduced. I mean, no doubt, a recession is coming--and its an awfully fine line between making the needed reforms and kicking the market in the gut wheb its down. But clearly there pretty immediately need to be new rules governing transparency--if one can ever call those kind of bundled debt securities "transparent." Lord knows it requires smart folks--all the more reason for Dems to get themselves together already.

                  by mattb25 on Wed Mar 19, 2008 at 11:02:03 PM PDT

        •  The rules that allow the fed...

          to pump capital into capital cash stretched financial institutions...one of the big reasons for the crash of 1929 was the run on the banks which caused many banks to go out of business.  In the modern day version of this there would have been a run on Bear Stearns with people cashing out their accounts and that would have panic around the world with people withdrawing their money from every brokerage firm causing a worldwide oollapse like 1929

          by dvogel001 on Thu Mar 20, 2008 at 05:25:22 AM PDT

  •  prevent? this is not over

    This has been bubbling a bubbling since last August. The shenanigans with Bear Stearns? Terrified financial troops, out of ammunition, are now throwing empty magazines to fend off an attack.

     The leverage will be unwound. People, places, and things we've come to know will vanish in a puff of asset deflation. I worry it'll crash hard enough here that it'll get into supply lines, so I've been stocking food since last summer.

     This is like nothing we've seen before - shares characteristics with the Great Depression, but it'll be much worse due to energy and environment issues.

    by Stranded Wind on Thu Mar 20, 2008 at 12:19:21 AM PDT

    •  Agreed it is not all over...

      by a longshot...it is just beginning...but we averted a 1929 like crash last weekend and hopefully we can prevent a Recession from becomming a world-wide depression...

      by dvogel001 on Thu Mar 20, 2008 at 05:48:45 AM PDT

    •  see this interesting take

      from Greg Palast: "Eliot's Mess: The $200 billion bail-out for predator banks and Spitzer charges are intimately linked."

      by gnat on Thu Mar 20, 2008 at 09:40:13 AM PDT

•  Having some real problems with the fed thingy.

  The Federal Reserve Bank doesn't have money per se.

  The Federal Reserve Bank doesn't print money.

  As a matter of fact, the United States of America doesn't print money either. Whenever the government needs money, it orders the Bureau of Engraving to print it but we then "borrow" the money from the Fed.

  The US Treasury issues bonds to be used as collateral for the money we "borrow" from the Federal Reserve Bank.

  Now then, what interest rate are we, the taxpayers, paying on the money we borrow? What interest rate is the investment banks paying?

  Why does a investment bank need to "borrow" money?

  The Fed has also cut the rate at which dealers borrow at the discount window to 2.5 percent from 3.5 percent, in two separate actions this week.

  In a bid to stabilize jittery markets, the Fed said on Sunday that it would allow investment banks to borrow from its discount window using a wide range of investment-grade securities as collateral.

  I think we taxpayers are not only getting screwed big time but continually. I also think we taxpayers will be paying interest on loans in default plus we'll end up with bad paper from the investment banks.

  It looks like a way for the investment banks to purge their bad loans.

  by 0hio on Wed Mar 19, 2008 at 10:01:43 PM PDT

•  The sky would fall if they did not. Rich

  people would not be able to afford all the shit rich people like to buy.  And it's all because they gave subprime loans to poor people!  Which is, of course, total crap.  A huge problem is well-to-do people getting into Adustable Rate Mortgages they could never afford...Atrios has a good piece on it now, but I suck at links.

  by mainecabinfever on Wed Mar 19, 2008 at 10:03:02 PM PDT

•  Here's a link that gives some persective to

  the current events.

  http://www.marketwatch.com/...

  Now then think about the size of this monster.

  $516 trillion dollars.

  A snip from the link....

  To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

  U.S. annual gross domestic product is about $15 trillion

  U.S. money supply is also about $15 trillion

  Current proposed U.S. federal budget is $3 trillion

  U.S. government's maximum legal debt is $9 trillion

  U.S. mutual fund companies manage about $12 trillion

  World's GDPs for all nations is approximately $50 trillion

  Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion

  Total value of the world's real estate is estimated at about $75 trillion

  Total value of world's stock and bond markets is more than $100 trillion

  BIS valuation of world's derivatives back in 2002 was about $100 trillion

  BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

  Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

  by 0hio on Wed Mar 19, 2008 at 10:15:32 PM PDT

•  Corporate Welfare

  I find it remarkable when people in need, perhaps a death in the family, a catastrophic health care bill, a brain injury in Iraq, an unplanned pregnancy, whatever the cause..and on welfare to be called bums by wingnuts but there are always reasons found for taxpayers to give welfare to multi national corporations worth billions with execs earning millions...the hypocrisy of this astounds me.

  by ohcanada on Wed Mar 19, 2008 at 10:35:32 PM PDT

  •  Tax dollars were gonna bail out Bear either way

    Sadly enough. If the Fed hadn't done it this way, and Bear went into Ch 11, the taxpayers foot the bill for the federally insured frozen assets.

    by mattb25 on Wed Mar 19, 2008 at 10:41:01 PM PDT

    •  not sure your comment

      answers the larger problem the poster is addressing, though, for reasons stated above. After all, this is not just about Bear Stearns, it's also about accessing how we got into this mess to begin with. The answer is the financial markets were underregulated.

      by gnat on Wed Mar 19, 2008 at 10:47:30 PM PDT

      •  Oh I Agree

        No question about it. The scary part is the trading strategies--some of them anyway--that Bear employed weren't necessarily wrong in the long-term (subprime stuff was obviously bad news)--but in lots of cases, it's just a matter of being so freaking over-leveraged that even if you're right long run, you can't keep meeting the short run demand from the lenders to refinance the collateral--hence margin calls that can't bet met. That system is really one complex monster. I sure hope Bernanke knows what he's doing.

        by mattb25 on Wed Mar 19, 2008 at 10:53:41 PM PDT

•  Greater Depression begins

  This has been coming since the Bear Stearns fund collapse last August. The junk bond market froze, the ABCP market froze, the auction rate securities market froze ... everyone has gobs of this "toxic waste" on their balance sheets and no one is loaning to anyone until everyone comes clean.

   Unfortunately that means 750 trillion in funny money derivatives get marked down ... and global real estate is only worth 75 trillion.

   So take a look at every stock, bond, etc, and imagine dividing by ten ... asset inflation is coming undone. Now.

  by Stranded Wind on Wed Mar 19, 2008 at 11:02:06 PM PDT

•  does the bear

  . . . well, you know . . .

  by Deward Hastings on Wed Mar 19, 2008 at 11:53:08 PM PDT