I guess it is now official. We no longer have functioning trading markets, at least in terms of serving their alleged purpose of giving companies access to capital. The Fed is no longer the lender of the last resort. It is increasingly becoming not merely a lender, but by adding equities to its list of acceptable collateral, has become the funding source of the only resort.
Willem Buiter once remarked that the Fed could accept a dead dog as collateral for lending, and we are getting close to that. I’m sure he’ll have more than a few withering words to offer on these moves.
The Fed’s announcement is typically anodyne:
The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities….
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…
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.
The Federal Reserve is expected to expand its lending facilities in the wake of the likely demise of Lehman Brothers, taking a wider array of securities, including equities, as collateral for its loans, say people familiar with the matter…
Fed and Treasury officials stood their ground through a high-strung weekend of negotiations in insisting the wouldn’t put public funds at risk to finance the rescue of another financial institution. The expansion of short-term lending facilities might be a twist to that — while they were unwilling to back another bailout, they are still struggling to find ways to ensure broader market stability.
Fed officials have been concerned for months about the resilience of a short-term secured lending market known as “repo” loans. It is the lifeblood of the brokerage industry, through which firms fund their day-to-day operations.
Repo lending is used by banks, brokers and hedge funds. Typically, a borrower hands over securities as temporary collateral for a loan. In normal times, the cheap funding is widely available.
I’m a bit flummoxed, The comment in the WSJ about equities does not track the Fed announcement. To my knowledge, stocks aren’t repoed (why would you? Any exchange traded stock is readily saleable, so there is no reason to hold equity inventories, and repos are a way to finance trading inventories). The Journal may have gotten ahead of the Fed announcement, or the Fed may be saving equities for a later announcement.
If I am reading the press release wrong, please correct me, but I don’t see anything equity-like there.
Or is this simply a deliberate bit of disinformation? This is the Administration that gave us “Saddam had weapons of mass destruction” to the UN no less, so I wouldn’t put it past some friends of the Fed or Treasury to place some calls that the officialdom could deny in a day or two.
Originally published at Naked Capitalism and reproduced here with the author’s permission.