The Fed uses Wall Street ‘shock’ as cover for deregulation

(8 pm. – promoted by ek hornbeck)

The Financial Times first reported in news that Wall Street banks are fighting for life early this morning that the U.S. Federal Reserve was making “it easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral.”

The Fed likely figured the shock of bank failure today was an excellent time to sneak in a regulatory change. The Fed “widened the set of assets eligible as collateral for loans of Treasuries to include all investment grade paper, and raised the size of these Treasury loans to $200bn.”

The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.

The NY Times reports that the Fed loosens standards on emergency loans. Not just loosen, but “dramatically loosen” their standards.

In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets – including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages – in exchange for emergency loans through the Primary Dealer Credit Facility.

The Fed created the emergency loan program in March, at the same time that it engineered the shotgun marriage of Bear Stearns by JPMorgan. In itself, the program marked a historic expansion of the Fed’s lending to cover investment banks rather than only commercial banks.

Under cover of the turmoil on Wall Street as a major investment bank declared bankruptcy and another investment bank was purchased by a consumer bank, the Fed is, once again, changing America’s financial flight plan while most people are distracted, looking at the burning wreckage of failed investment banks.

As I suspected back in March, the Bush administration and Federal Reserve are going to try to use the shock of the collapsing economy to quickly deregulate the entire economy to make it easier to loot.

So what will the Federal Reserve now allow as collateral?

Before the Fed’s announcement on Sunday, investment banks could pledge as collateral any kind of “investment grade” debt securities, which meant securities rated BBB or higher and included many securities backed by subprime mortgages.

But with the new announcement, the Fed will accept stocks and some debt that has junk-bond status and some securities that may have few real buyers.

More deregulation! Welcome to the world of “high-risk collateral”! About 15 percent of a bank’s collateral now can be in equities and debt “below investment-grade”.

So does this new loosening done by Bush’s Treasury Secretary Henry Paulson and Federal Reserve chairmen Ben Bernanke do for us? In exchange for Wall Street to cover its own risks, they are “potentially putting more taxpayer money at risk.”

The public statements about getting tougher with suspect banking and their calls for more regulation seem to be just a clever smokescreen to give them cover to do exactly the opposite — use economic shock to sneak in more deregulation that creates more taxpayer money available for corporate looting.

In the end, the government succeeded in getting Wall Street to create its own insurance policy. But at the same time, the Fed, in agreeing to loosen terms under which it lends money to firms, is potentially putting more taxpayer money at risk.

The events over a harrowing weekend indicate that top officials at the Federal Reserve and at the Treasury will take a harder line on providing government support to troubled institutions. But that does not mean they are unwilling to provide indirect help, or even relax regulatory requirements temporarily.

So, by getting Wall Street to agree to spend bad money on bad investments, the Federal Reserve is put more of our good money to shore up their bad investments. Wall Street upheaval! Time for deregulation.

I’m not an economist. I’m not a professional investor. So this is just my read, but it sure seems like shock doctrine at work, once again.

 

^{Cross-posted at Daily Kos.}