Sunday, March 16, 2008

Fed Opens Discount Window to Broker Dealers

(Naked Capitalism) 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.

In addition, keep in mind that the JP Morgan deal for Bear does not necessarily mean that customer will not continue to flee. If the exodus continues, the firm might still have to declare bankruptcy, which could well be a systemic event. So the Fed is using whatever firepower it can marshal.

No comments: