Seattle Bubble Forum Archive

Staring at spreading financial dangers, the Federal Reserve announced a rescue package that would pour as much as $200 billion into banks and investment houses and allow them to put up risky home-loan packages as collateral......

......The Federal Reserve announced it would allow squeezed financial institutions -- including big investment houses and banks -- to borrow up to $200 billion in super-safe Treasury securities by using some of their more risky investments as collateral.

The Fed announced the creation of a new Term Securities Lending Facility (TSLF) to provide financial institutions with 28-day loans of Treasury securities, rather than overnight loans. The institutions would pledge other securities -- including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac -- as collateral for the loans. Fed officials said it's the first time they'll be accepting mortgage-backed securities through this type of lending program.....

.....White House press secretary Dana Perino said President Bush welcomed the latest step and "has full confidence in Ben Bernanke at the Fed".......

If the Prez has "full confidence" it must be a good idea, right?

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This seems to be another stall tactic. The banks are going to swoop this money up and use it just so they have some reserve capital. It helped the stock market today obviously, but my read is the fed is doing this so it won't have to lower rates again. Since a 75pt drop in the rate is already priced in, we'll be back to where we started shortly.

I agree rcc.

Question - what happens when defaults occur on the home loans used as collateral?

Well, I guess the Fed could take ownership of the foreclosed properties as repayment. That would open a large can of worms though. It means that in this case, the Fed actually had just printed money, since they sent out $200 billion and got back $80 billion in defaulted homes. Also, what's the Fed going to do with all those homes.

My real guess is that

A) The money goes out, and (hopefully?) gets credit flowing again, which opens up the economy, at which point the banks can repay.
B) The plan doesn't work at all, and we see some major bank(s) who look like they are going bankrupt. At that point the Fed just forgives the debt as a 'public service' since these banks are TBTF (too big to fail).
C) The banks hold onto most of the cash out of fear. The economy continues tanking, making their fear justified, the term of the loans comes up, and the Fed gives them an extension. Or something like that.

I'm sure those Bear Stearns executives that received muti-million dollar bonuses have donated generously to fix the liquidity problem. ---- Ha ha ha ha ha! Sometimes I crack myself up!