this is an extraordinarily bad idea

[solarbird]

This is a very, very, very bad idea:

The Fed has announced that it will take equities as collateral for loans. "Equities" is a fancy name for stocks.

That's right - for the first time in history, now banks can take stocks to the discount window. Maybe even their own stocks.

The Fed has gone from taking only the highest-quality securities - "AAA" rated debt instruments - to taking everything up to and including the most dangerous (common stock) all at once!

I mean omg.

Comments

[emrecom.livejournal.com]

McCain announced that the economy is fundamentally strong.

Then again, he didn't actually say which economy.

[sistawendy.livejournal.com]

I for one welcome our new Chinese overlords!

[llachglin.livejournal.com]

It looks like American capitalism is doing its best to take itself down and the government with it. You know that when this scheme fails the federal government is going to assume all of the debt in an attempt to bail everything out. At some point (soon?) the ability of the government to save investors from themselves at public expense will hit a wall--and then what?

[kodi]

If I were reading a work of fiction in which the Fed did that, I would throw it across the room, disgusted with the lack of realism. I don't even know what else to say. I'm just going to splutter quietly for a bit.

[silussa.livejournal.com]

Fundamentally strong...."but very difficult times."

http://www.marketwatch.com/news/story/did-mccain-economy-gaffe-prompt/story.aspx?guid={AB97BD36-9F9C-4239-ABC9-6B9E89D5C194}&dist=msr_5

[westrider.livejournal.com]

Shouldn't that be "fundamentally wrong"?

[wrog]

Over the last 20 years you have been repeatedly lied to, bamboozled and scammed by those "in power", including the members of both political parties, The Fed, and Treasury.

Right. Members of both parties. I love the way we have to bend over backwards to keep our criticisms even-handed, lest we be viewed as hyper-partisan nutballs.

Never mind that it was a Republican-controlled congress that authored the repeal of Glass-Steagall, the Commodity Futures Modernization Act, and the host of other deregulation measures that got us into this mess. Never mind that both Bernanke and Greenspan were Republican appointees (compare with Voelker, the last Democratic appointee).
Never mind that we have one candidate claiming that the economy is fundamentally sound while the other actually is (occcasionally) talking about the systematic transfer of wealth to the top 1% over the past 30 years (... and I'm sure if he were to delve into the detailed causes of this in his stump speeches, our pro-business-conservative-controlled media would be more than happy to give him the extra air time...)

But if it's 300 Republicans and 20 Democrats who've fucked us over, we can just say "members of both parties" and sweep any fundamental distinctions in philosophy under the rug.

Obviously, what we need are new parties, like the Libertarians, who cheered the repeal of Glass-Steagall and remain adamantly opposed to all attempts at financial re-regulation, oversight, and enforcement of anti-trust rules against our largest financial conglomerates (yes, I'm looking at you, Ron Paul...)

I also like how the systematic violations of (the original) FISA and the Geneva Convention, the Hatch Act are (apparently) no big deal, but now that the Bush administration is violating the Federal Reserve Act, it's time to declare war?

Okay, then.

[solarbird]

Karl, the person you're quoting - who doesn't read this as far as I know - is a former Newt Gingrich Republican. He even has one of those Speaker's Gavels, remember those? He's also a two-time Bush supporter (regretting it now) who has taken a lot of GOP heat for saying that the GOP are, and IIRC these are his words, destroying America. So you might want to cut him a little slack here.

(He's also called for national popular action several times before this, tho' mostly on economic matters. This is simply the most recent. Not that it's done him the least bit of good. And he's not calling for a third-party vote in this election; he's endorsed Senator Obama for President. And he's not at all for the Libertarian Party, which he considers as useless as you do; unlike you, however, he would like to see a new party arise after this election.)

So I'm not sure of my point in responding here; I linked to him in this case mostly because he was the one talking about this latest disastrous trick today, and I didn't have time to find anyone else this morning on my way out, and I didn't want to hold the post until later.

Better source, for archive purposes

[solarbird]

Fed Expands Lending Facilities in Bid for Stability
In Latest Move, Equities Accepted As Loan Collateral
By JON HILSENRATH and SUDEEP REDDY
September 15, 2008; Page A18
The Wall Street Journal

http://online.wsj.com/article/SB122143939332934501.html?mod=special_coverage

The Federal Reserve will expand its lending facilities in the wake of the likely demise of Lehman Brothers Holdings Inc., taking a wider array of securities, including equities, as collateral for its loans, the central bank said late Sunday.

The move, another landmark step in the Fed's efforts to address the deepening credit crisis, is meant to calm markets as they head into one of the most perilous trading environments in decades with Lehman's massive market positions on the verge of being unwound. It also capped a weekend of brinksmanship with Wall Street.

After the rescues of Bear Stearns, Fannie Mae and Freddie Mac, Fed and Treasury officials were determined to avoid bailing out another struggling financial firm. They drew the line at Lehman and stood their ground through a high-strung weekend of negotiations, insisting they wouldn't put public funds at risk to finance the rescue of another financial institution. The expansion of short-term lending facilities showed that while they were unwilling to back another bailout, they are still struggling to find ways to ensure broader market stability and are prepared to take new steps to do that.

After the collapse of Bear Stearns in March, the Fed said it would make short-term emergency loans to investment banks under a lending facility called the Primary Dealer Credit Facility. Late Sunday, the Fed said it would take a broader array of collateral from firms for the facility, including equities. Another facility, in which firms can swap risky securities for safe Treasury bonds, was also expanded.

[wrog]

He even has one of those Speaker's Gavels, remember those?

actually, no.

He's also a two-time Bush supporter (regretting it now) who has taken a lot of GOP heat for saying that the GOP are, and IIRC these are his words, destroying America. So you might want to cut him a little slack here.

Fair enough. I was going by what was in the piece itself.

Then again, while I can understand how someone might have voted for Bush in 2000 under the mistaken impression that he was a moderate (given his sparse track record from Texas, it not being well known outside of Texas that Governor of Texas is a glorified cheerleading job with little actual power, and if one wasn't prepared to trust sources like Molly Ivins, stuff he actually was responsible for went almost entirely unreported...), it's still the case that anybody who voted for Bush in 2004 needs to be slapped around a bit -- although it sounds like he might even agree that he needs to be slapped around a bit.

And it's always good to have "destroying America" rhetoric coming from folks who can't be immediately dismissed as leftwing nutbags.

[denelian.livejournal.com]

waitwaitwaitwait... how does it work? how is a stock - a thing whose value FLUCTUATES EVERY SECOND - something to base a loan on???

nonono, really, how does that work? do they look up the price at that minute? or do they have stockbrokers who "guestimate" what the stock will do over the term of the loan? does the loan forclose if the stock bottoms outs?

and most importantly; does this mean that monopoly money is now legal tender?

[king-chiron.livejournal.com]

Let's not forget that Bill Clinton signed it. You remember Clinton, the one who signed all sorts of horrible acts into law like Gramm-Leach-Bliley, DOMA, etc and yet is considered a saint by many progressives, for reasons I have a lot of trouble understanding.

[solarbird]

He even has one of those Speaker's Gavels, remember those?
actually, no.

Oh man. If you were a Republican in the 90s, those were the shit. Getting one of those meant you were a serious supporting player. People would go Oooooooo.

[wrog]

Of course I remember Clinton; he did a number of stupid things. Gramm-Leach-Billey was in fact the repeal of Glass-Steagall; that he signed it into law while embroiled in the Lewinsky mess doesn't excuse it.

I have not at any point been trying to claim that the Democrats are entirely pure and wonderful (or that the Republicans are universally evil -- they did pass Sarbanes-Oxley after all, though at that point one could argue that the accounting abuses at Enron and Arthur Anderson were so glaring that they could hardly have done otherwise; on the other hand more recent abuses in other areas have evidently not inspired similar acts of contrition, so who knows what's really going on... bottom line is neither party is a monolith. Never mind that Oxley and the rest of the Better Republicans have been dropping like flies...).

Clinton was DLC. One of the challenges of the upcoming Democratic administration is going to be making sure that the DLC won't be calling most of the shots -- hence the importance of defeating Hillary Clinton in the primary. Mission accomplished, thus far. To be sure, Obama has been taking on and apparently listening to an unfortunate percentage of DLC advisors. To some extent, these folks just make up the atmosphere in DC and are thus unavoidable. On the bright side, Obama's history as a community organizer suggest that he's going to be less sympathetic to DLCism than the founding-member Clintons have been, moreover he has a history of hiring people he doesn't totally agree with just so he can have the various points of view available. On the dark side, there are certain things we're just not going to know for sure until he actually gets into office; the Joy of Dealing With Politicians Part 938.

Clinton basically held back a tide, and for that he deserves some credit. He was able to win elections where other could not. And he outmaneuvered Gingrich, who was out of the picture within about 4 years of his "revolution". If we had had Republican presidents straight through, there's no question things would be a lot worse right now.

[solarbird]

Fuck if I know. And no, but it might be collateral for a Fed loan.

[epawtows.livejournal.com]

To be fair; stocks are frequently used as a form of collateral, so there are procedures in place to value them for that purpose (I'm not saying that they are *good* procedures, but they exist). The point of complaint is that the Fed has never done this before. It's always been done between private entities, and is one (among many) of the financial tricks that got them in trouble.

[kodi]

In the examples I'm familiar with (between private parties) where stocks are used as a form of collateral, if the stock falls below a specified value the loan either comes due or requires additional collateral. In that case, when we talk about the value of the stock as collateral, it's that value that would be used.

The fundamental problem, in my eyes, is that stocks are not a commodity; the act of liquidating them changes their value. It smacks of a cats-to-the-rats scenario to me, although I can see how controls might be in place to prevent that.

[wrog]

well, brokers do margin loans all the time, and there's a whole regulatory framework set up to deal with it (cf. Reg. T and friends...)

... none of which, I suspect, will apply to these transactions.