Sunday, March 23, 2008

When Can I Go To The Discount Window?

Bernake is currently wracking his brains for yet another facility to thrust at the bond market to bring investors back from the brink of the abyss. It seems like every time he introduces a potential solution, the market breathes a big sigh of relief before resuming its frenzied panic. While it's true that spreads in the bond market tightened last week overall and equities didn't fall off of a cliff, major dislocations remained in the money markets. Despite the fact that the Fed is going to flood the market with Treasuries this week when it commences the $200 billion TSLF( Term Securities Lending Facility), investors are still hoarding treasuries as evidenced by the divergence in repo rates before the long weekend. My sources tell me that treasuries were trading with a zero handle (down to .15) while other collateral was getting financed at much higher rates. Why would investors be hoarding treasuries at ridiculous prices if they knew that a huge slug of supply was going to hit the market in less than a week? I can only hazard a guess: Because all fixed income investors care about right now is getting their principal back. They want to own the most liquid, most secure investment on the planet and that is still US treasuries. So the good news is, even though we may be on the brink of economic mayhem, at least investors still hoard US treasuries and not, say Thai bonds. The bad news is, nobody is concerned with treasury prices getting whacked when the Fed blasts the market on March 27th. And that might mean that $200 billion is not enough. The repo market is HUGE. Literally trillions of dollars change hands every day. While Bernake is addressing the right problem with the TSLF, it may not be large enough.

According to Bloomberg, the Fed is contemplating buying mortgages outright as another solution to the credit (or rather lack of credit) problem. So, let's review everything the Fed has tried so far: They've injected record amounts of liquidity into the repo market. They've agreed to accept anything including spare tires as collateral against their loans. They've promised to provide cash over quarter ends, year ends, out of helicopters. They gave JP Morgan a call option on Bear's stock with a $2 strike price by guaranteeing $30 billion in Bear's debt. They opened up the discount window to those evil primary dealers. And now they want to buy mortgages outright from investors? I have a better idea. Why not open up the discount window to all of America? Everyone complains that the Government is bailing out Wall Street but not Main Street. I have a few credit cards that need refinancing. Wouldn't it be much easier if I could just call up Ben and get some cash, instead of waiting for some dumb lender to have room on his balance sheet again? The funny thing is, if I called Ben Bernake and asked him to open the discount window to me, he would rub his chin and say "Yes, of course! Let everyone come to the discount window! Here's $10 grand! Take it! Take $20! Just take my money! Take my money!!"

2 comments:

jack said...

privatize the profits; socialize the losses. ain't this country great?

Stephen said...

Exactly....Let Wall Street push all the profits up front...get paid for it....gov't steps in to clean up the mess...thus costing all taxpayers...you've nationalized the banking system. Problem solved. Oh yeah, Goldman said losses are going to be around 480 bln now and seeing how we're at 195 bln I guess the Fed and U.S. Govt is going to take that loss of 285 bln so that's good right?