The Federal Reserve Expands Direct Borrowing

From Calculated Risk:

Fed Announces New Initiatives, by Calculated Risk: From the Federal Reserve:

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

This is along the lines of what I've been pushing for lately, though I'd like to see even more and I'd rather see asset trades instead of borrowing. But the Fed seems willing to extend credit or guarantee assets as needed, so now it's time to start pushing to get the mortgage repurchase plan Brad DeLong talked about in place which will, hopefully, dampen the wave of foreclosures that is eroding asset values, and to think about other stabilizing measures.

On the financing arrangements referenced in the statement, if you haven't heard:

JPMorgan buys Bear Stearns for $2 a share, FT: JPMorgan Chase on Sunday night agreed to buy Bear Stearns, the stricken US investment bank, for around $230m in shares in a deal that ... highlights the serious risks faced by banks during the credit crunch.

JPMorgan’s cut-price takeover of Bear, which has the backing of the Federal Reserve and the Treasury, was agreed before the opening of Asian markets on Monday morning in an attempt to stave off a run on other banks.

However, the deal, which values Bear at just $2 per share, compared with the $169 hit in January last year and the $30 reached on Friday, will wipe out the value of the investments of Bear’s shareholders including some of its senior management.

JPMorgan said that in addition to the emergency loans extended to Bear on Friday, the Fed had agreed to provide fund up of $30bn of Bear’s less liquid assets.

The rare arrangement significantly decreases JPMorgan’s risks and underlines the authorities’ concerns at the prospect of seeing one of the largest US investment banks go under.

The Federal Reserve and the Treasury feared that unless the Bear crisis was resolved promptly, there was an increased risk traders might turn their sights on other US and European banks.

“The Fed is most nervous about the systemic risk,” said one senior executive at Bear ... before the deal was announced “The government needs to stabilise the financial system.” ...

Update: The WSJ Economics Blog has more on the expansion in direct borrowing and on the quarter percent cut in the discount rate.

Update: Was it painless?:

More Lucky Duckies, by Atrios: Ouch.

Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason Inc.'s Private Capital Management Inc. money-management firm, have seen the value of their stakes in Bear Stearns plummet. The pain could be most acute for Bear Stearns's employees, who are steeped in a culture of personal ownership -- and hold about a third of the firm's shares outstanding.

Bear has over 14,000 employees.

...ouch:

Perhaps moreso than any other major investment securities firm, Bear promoted a culture of circled wagons, an us-against-the world camaraderie. As part of that effort, the investment bank paid a significant portion of its employees’ compensation in stock. On its Web site, Bear says that its employees own about one-third of the firm. That translates into about a $5.23 billion loss on paper for Bear’s employees over the last year, as the firm’s stock plunged 79.4 percent.

While presumably not evenly distributed across employees, that amounts to about $375K per employee.

Update: The dollar is falling.

Comments

[James Kroeger]

This is along the lines of what I've been pushing for lately, so now it's time to start pushing to get the mortgage repurchase plan Brad DeLong talked about in place and to think about other stabilizing measures.Why Mark? Why are you and Paul and Brad so willing to 'put aside' the justice issues that are involved in this whole mess? Yes, I agree that the working poor should not be forced to suffer a long and deep recession just so those rich bad guys get punished to the fullest extent, but why do you guys [apparently] dismiss out of hand the possibility that both justice and minimized suffering is possible? Are you guys scientists, or aren't you? Look and other possibilities and at least give some good reason for not pursuing more direct approaches.

Instead of worrying about the confidence of the financial community, go ahead and let them all experience the full meaning of risk, losing everything in a full-blown moral hazard hurricane, but only after Congress arranges to quickly buy up the assets of all the failed banks at fire sale prices, re-opening them almost immediately, fully capitalized with taxpayer funds. The whole thing could be over with in 6 months.

Yes, real estate prices would come down. Some people would be hurt by this, but at least they would be people who [typically] are affluent enough to handle such losses 'in pretty good shape.' Once prices have recovered from the collapse, things will begin to improve. Unemployment suffered by the working class would be mercifully brief, if nothing is done to prevent the collapse.

Can't you at least deal with this kind of alternative economic path on a theoretical level? Allow moral hazard to be restored to the financial industry. Dedicate your intellects to explaining how Congress can fix it all up quickly after the markets have had their way with greed.

Or is this kind of speculation somehow beneath you?

[save_the_rustbelt]

As much as I would like to see suffering by the "masters of the universe," letting this forest fire spread too far could cause consequences we do not know how to deal with.

I am too close to retirement to see too many of my (fairly conservative) investments meltdown in order to punish Bear Sterns. And....

This isn't over yet. This could spread like a fire in dry brush in southern California, and I don't think we want to see that.

The scary moment will be when we have no remedies. I hope we do not get there.

[dd]

e-minis down to 1264.75 (that's minus 26.50). This is not good at all. Lehman is in danger and the rest of the big 15 can't survive this kind of meltdown. ECB better do an emergency cut and GB too. This is now global.

[Dickeylee]

$2 a share?!? They were at $155 a share last year. The next shoe to drop? Lehman? Hell, might be JPM themselves. So the $30B tonight, is it in addition to the $200B Friday? And the "emergency" 25 basis points tonight, plus whatever they pull out of their hat Tuesday, do they really think that will "solve" this? The Dollar, and what about the Dollar? Why Paulson was all over TV this morning stammering and stuttering about a strong Dollar...Good God, do all of Bush's boys talk like him? I'm a bit embarrassed for the poor chap myself, telling one lie after another trying to keep his story straight.

[James]

Did you see the dollar take a nose dive on that, along with the US equity futures with the SP down about 30 points?

The swiss franc just shot past the Canadian dolar and the US dollar, and gold is at 1,026.

[James]

Perhaps we should call this, "the Bernanke-Paulson Curve," except I can't help thinking that it does an injustice to Sir Alan. "the Greenspan Après-moi Le Deluge?"

http://www.wallstreetbear.com/image/bsc.png

[anne]

Ben Bernanke is an historical scholar and has prepared for this as much as any Fed chair could; there is reason for confidence now, there will be sorting after markets are settled.

[anne]

There is no reason to be concerned about a further decline in relative value of the dollar; Brad DeLong has taught this well in past years and even after agreeing for quite a while I questioned the problem from the perspective of a Robert Rubin but realized all along and especially realize now that a decline in dollar value will be no problem.

There is no possible reason to sacrifice the economy for the sake of currency value; I know of no instance where this stance has not been valid.

I am completely confident in Bernanke.

[anne]

Bernanke knows Depression banking history, and knows Japan, cases which were neglected by many thinking there could be no contemporary relevance even though the Japanese financial crisis was so recent.

[Bruce Wilder]

$2/share!
$30 > $2 in a weekend! "moral hazard hurricane" in action, I'd say.

[ddt]

a silver lining: Bear Stearns shareholders walked away with almost nothing. what do you even call this? a federally underwritten liquidation?

[Organic George]

I guess dispassionate support for the greater good, that is the corrupt US financial system, is easy when you view common taxpayers as the ultimate piggy bank. When did "To Big to Fail" morph into bail everyone out? The Fed gave JP Morgan 30 bl to pick up BS.....what else did they give away? Did the Fed bring the taxpayers to the table and negotiate a decent ROI for us?

No, instead the Fed comes up with some new smoke and mirrors, like extending the borrowing dates from 30 to 90 days to cover up those pesky reporting rules that would show the rest of the corrupt cartel is insolvent.

Mark one question; will you advocate for higher wages to keep up the the rapid increase in inflation that result from these disastrous policies? Oh yea I forgot, inflation is always better than disinflation.

[donna]

I call it Roubini's step 9.

Nikkei down 514. Dollar at 96 yen. Dow futures at 11731.

It will be a very nasty and painful week ahead in the financial markets. And this bailout is just the first....

[esb]

I have a number of blunt opinions to express (over time) to follow those on the previous thread.

First, with respect to the ratings agency S&P, which assigned a BBB rating to BSC on Friday, 14March2008, on a day when the impending sale would fix an enterprise valuation at at -$252 per share (after taking into account the $254 per share Fed valueless asset guarantee "kick in" indicates that this rating agency simply cannot be trusted in any way whatsoever.

Second, he willingness of the central bank to pretend that it will properly determine what constitutes investment grade private paper for any of its "facilities" (the equivalent of BBB- or higher) is without doubt the most duplicitous fraud I have ever had occasion to encounter. Bernanke and his crew (in what seems to have become a continuous and permanent BOG meeting) will employ whatever mark-to-fantasy modelling methodologies they deem necessary in support of his self-defined mission, to purchase vlaueless private paper "whenever necessary" to prevent any IB firm from recognizing its actual current negative net worth,

so as to save the financial system through a campaign of deceit, deception and outright lies.

What matters here is the need for the $254 per share Fed kick-in to make this $2 per share deal fly.

Grab your wallets (and whatever else you can get your hands on) and run.

(But do not grab any LEH or GMAC/GM).

They're dead.

[esb]

What is being discussed throughout Europe, the UK, the Persian Gulf, China, SE Asia and everywhere else for that matter is the -$252 per share enterprise valuation of BSC prior to the $254 per share Fed kick-in.

As I ponder this stunning number, I conclude that a man on a mission to save the financial system would have been better served by simply allowing BSC to enter bankruptcy, so as to hide that number for a period of months or even years,

but now the little kitty is out of the bag.

And what an ugly little kitty it is.

[bullbust]

Why Mark? Why are you and Paul and Brad so willing to 'put aside' the justice issues that are involved in this whole mess? Yes, I agree that the working poor should not be forced to suffer a long and deep recession just so those rich bad guys get punished to the fullest extent, but why do you guys [apparently] dismiss out of hand the possibility that both justice and minimized suffering is possible? Are you guys scientists, or aren't you? Look and other possibilities and at least give some good reason for not pursuing more direct approaches.

Because it is impossible for them to admit that their neo-liberal views on markets are not right all the time.

These are the people who called Roubini a chicken little, and dissed Robert Shiller. You think they will eat crow?

You want a honest opinion, read this
www.nakedcapitalism.com/2008/03/fed-opens-discount-window-to-broker.html

The Fed opened the window to broker dealers. This is a shocker, a sign of the Fed's desperation.

Recall that one of the reasons the Fed was able to assure us it wasn't taking too much risk in its Term Auction Facility was that it said the institutions involved were sound. It doesn't supervise broker-dealer and cannot make any such assurances. This is simply extraordinary.

This move is intended to last only for six months, but if the financial markets continue to be rocky (likely) and broker dealers use the facility, it's hard to know how long it will take to wean them off it. However, use of the discount window has been seen as a sign of weakness, and use has therefore been minimal. That may mean this move proves to be largely symbolic, since the broker-dealers may not avail themselves of it either. The next measure would then be to allow them to use the TAF. Expect that to come soon.

Loans to institutions that are not supervised. Remember the housing mess? It was no-doc stated income liar loans.

Now the Fed is going to do stated income liar loans to Wall street brokers.

And like Save_the_rustbelt, people who are going to see their purchasing power vanish, will think that their investments didn't melt down. Purchasing power melting down is OK.

Who benefits from that? Those who have more investments than needed for supporting their spending.

Who loses? Those who have no investments.Those who can barely keep up.

Bernanke decided to plunder the bottom 90% to protect the top 10% from losses.

[Robinia]

Reminds me of that old song "I am Changing My Name to Chrysler" from the days of the Chrysler bailout (which, everyone remembers, stabilized the US auto industry and allowed for its turnaround into long-term profitability. Not.)

"I'm gonna tell some power broker, what you did for Iaccoca
Would be perfectly acceptable to me!"

I know, stabilize we must, or face horrors unknown. But, sometimes I think we would be better off replacing all the middle and upper management of these financial-industry giants that we bail out with run-of-the-mill unemployed people. You know, just to test the principle that the outlandishly excessive compensation of financial industry managers is based on either talent or ability to produce wealth. I'm thinking some regular Joes and Janes who are down on their luck could screw up almost as well as the Masters of the Universe, if only the Fed would give them the backing and the chance.

[bullbust]

Think of it - 99% of the established academic economists DID NOT get what was going in. They were all in blind, idol-worshiping sort of support of Fed policy under Greenspan and Bernanke. [Even the Krugman is a deserter, who bailed out when it became obvious]

Not only that, these 99% ostracized and ridiculed the few economists who dared to question them. [The heterodoxy debate] They behaved like a mafia. It wont be wrong if someone denoted these 99% a cabal of jackals, aiding the crooked predator lions of corporate Wall Street. Lying and strutting is the fundamental priority, they have no allegiance to the science itself.

Amateurs like Calculated Risk, Naked Capitalism, Steve Waldman etc have infinitely larger devotion to the discipline than any of this cabal.

Why even the gold nuts were far more honest. Everything that these people -who are considered loony by the economists - have come to pass..

Debasing the dollar ? Check.
Inflation? check
Gold is best? Check
Wall St. pigmen are fraudsters? Check
Fed will buy mortgages to bail out Wall St? Check.
Dont buy stocks? Check [In case out resident cut-n-paster starts quibbling, your stock market real return in last 10 yrs is Zero.]
Fed is a racket? Check.

Even these nuts are better than the economist cabal.

[It's the turning point that counts]

Your hero Roubini ran and hid under a rock a full year or more before there was any trouble at all. Go look at what he wrote in August or September in 2006. If you call a recession year after year, eventually you will be correct.

Go look at, say CR's pool on when there would be a recession after he had already called one - and missed. Go back and read his calls on turning points in employment. All of it was adjusted over time, but contemporaneously, not always so good.

Take a look at Big Picture - same thing. Called a turning point way early - spring I believe.

Not a one of them, none, got the turning point right. Everyone knew there were problems, but they all missed when the downturn would take place. That turning points are hard to call is no surprise to anyone - economists teachh that - and economists shouldn't be punished too severely for not calling a turning point year or two in advance like the examples above because they know how fruitless it is.

Go look in their archives...

[esb]

bullbust:

You need to grasp the overarching "high concept" of the Burnanke position,

and that is that he stands ready to exchange United States dollars for any and all worthless paper on the planet, with the following comforting caveat,

"when necessary."

Now, don't you feel comforted?

[BrantW]

"Bernanke knows Depression banking history, and knows Japan, cases which were neglected by many thinking there could be no contemporary relevance even though the Japanese financial crisis was so recent."

I strongly dispute this. All these jokers believe the the Depression was caused by FED errors from 29-33. The Depression was caused by the easy credit of the 20's. The current crisis was caused by easy credit for the last 15 years....mostly thanks to Alan Greenspan and his blind faith in Wall Street, and his need for the adoration of the Wall Street players.

It is not that complex. In the world of 1929, the system could not support credit/debt in total that was 270% of GDP. It collapsed. In the world of 2008, the system can not support credit/debt in total that is 350% of GDP. It is collapsing.

The FED can not change the pain which will be endured....only shift it around to different parties.

[bullbust]

Not a one of them, none, got the turning point right

Yeah, right. As if any of this has to do with predicting "when" market turnings happen.

Obviously some people do not understand the difference between "when" and "why".

Hey, even your buddy the Krugman get's the "why" now, when it's way too late.

[Dickeylee]

GWB, the WORST President, ever!

[Cyrille]

Krugman has been explaining the very same causes for trouble for years. You may not have read his chronicles, but then don't state that he had not seen it.

Calling Krugman inconsistent is a pretty tough case to make. Obstinate maybe, but inconsistent?

[Bob]

Bob says the same people most responsable for the sub prime
mess shaking the world markets are now given credit from
the Federal Reserve. This will enable the very same firms
to leverage this borrowed fed backed money to globaly control securities all over the world. Hedge funds may play
some very interesting roles in our future. I find it very hard to believe the Federal Reserve has been alowed to pull
the wool over our eyes this easily. Wake up !WAKE UP!!!