WELCOME MAT FOR LOSERS
Historically, the "discount window" is where losers, of one kind or another, go to get money (to "pawn" their securities at a "discount").
What size is the (adverse selection) headache that the Fed might create for itself, if it sets the so-called "margin requirements" on collateral more liberally than where the market is currently setting them?
While the proverbial opening of the window at a lower discount rate is a genre of confidence boosters, it may have limited effectiveness, because it is not banks that are affected, by and large, by the reported, current unwillingness to buy-and-sell poor credits, because they are not holders of them.Money quote:
Under unusual and exigent circumstances, a Reserve Bank has the legal authority to advance credit to individuals, partnerships, and corporations that aren't depository institutions [banks], after consultation with the Board of Governors of the Federal Reserve System. To do so, the Reserve Bank must first determine that credit isn't available from other sources and that failure to provide the credit would adversely affect the economy. This authority has not been used in about 70 years.
[Now you know why economists who were just recently touting America's strength, suddenly see "recession" ... gulp.]
THE HEDGE FUNDS, AMERICAN-STYLE KEIRETSU?
If it is hedge funds that need to go to the discount window with their CDOs and CMOs, they probably cannot do it directly, without exception to the above "rule".
It's hard to know whether their brokers will do it for them. Will the Fed ask the brokers to use their own reserves first, before rushing to the discount window? What size is the (adverse selection) headache that the Fed might create for itself, if it sets the so-called "margin requirements" on collateral more liberally than where the market is currently setting them?
Even if the banks aren't affected directly by the current credit issues, they support the stylized keiretsu of non-bank financial companies that are.
So, two questions come up.
- Will they use their own capital / reserves to support or "bail-out" a stylized network of off-balance sheet, highly leveraged trading operations, a.k.a. "hedge funds".
- How much of the current "crisis" is, in fact, solvency related and not a smoke screen to get a handout and, thereby, recover some of the substantial losses that certain keiretsu operators have experienced so far this year?
