Daily Market Commentary for August 23, 2011

Federal Reserve secretly loaned up to as much as $1.2 trillion to U.S. and foreign banks. (read more at Millennium-Traders.Com) http://www.millennium-traders.com/news/newscommentary.aspx

The Fed has been reluctant to share this information with Americans but, now has been made public due to a lengthy Freedom of Information Act (FOIA) investigation. Fed officials argued for over two years that releasing the identities of borrowers and terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.

Morgan Stanley borrowed $61.3B from one Fed program in September 2008, pledged a total of $66.5B of collateral, according to Fed documents. Securities pledged included $21.5B of stocks, $6.68B of bonds with a junk credit rating and $19.5B of assets with an 'unknown rating,' according to the documents. About 25% of the collateral was foreign-denominated.

The Fed reported it had no credit losses on any of the emergency programs. A report by Federal Reserve Bank of New York staffers in February 2011 said the central bank netted $13B in interest and fee income from the programs from August 2007 through December 2009. “We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.” The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time. Rules which mandate that banks maintain enough cash and easily liquidated assets on hand to survive a 30-day crisis, do not take effect until 2015. Another proposed requirement for lenders to keep 'stable funding' for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.


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