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Sunday, March 16, 2008

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.


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.

    Posted by on Sunday, March 16, 2008 at 04:55 PM in Economics, Financial System, Monetary Policy | Permalink  TrackBack (0)  Comments (25)


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