Fed Widens Collateral, Banks Set Up $70 Billion Fund

[dkf]

By Craig Torres and Liz Capo McCormick

Sept. 15 (Bloomberg) -- The Federal Reserve widened the collateral it accepts for loans to securities firms to include stocks in an effort to help Wall Street weather Lehman Brothers Holdings Inc.'s plans for bankruptcy.

The Fed also yesterday boosted its program for lending Treasuries to bond dealers by $25 billion, bringing it to $200 billion. At the same time, a group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. formed a $70 billion fund to ensure market liquidity.

Central bankers and banking leaders acted after three days of emergency talks led by Treasury Secretary Henry Paulson and New York Fed President Timothy Geithner on the mounting turmoil in financial markets. Yesterday's steps may spur speculation the Fed may take further action, including lowering interest rates, to stem a deepening in the yearlong credit crisis.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a2O7cx5i0.zM&refer=home

[flamingdem]

1. Isn't that speeeciial

Hmmm

[grasswire]

2. can someone explain the significance of this?

aren't most of those equities worthless?

[dkf]

3. I don't get that either.

Someone on a blog said they were confused because they thought the Fed was allowing mortgages because they weren't very liquid and weren't stocks liquid?

[abumbyanyothername]

4. The fed is propping up the stock market

because LEH will at some point have to liquidate its inventory. It holds positions in equities that it "makes a market" in and when it stops making that market, those equities will go back into the hands of people who actually want to own them, not just hold a trading inventory.

It's like if there were too many houses, only someone had a bunch of house that they held so that they could buy and sell them at very short intervals (scalp) and then that company went BK. All of a sudden there would be all those new homes looking for more or less permanent owners and one would expect the price of homes in that locale to go down. Drastically.

That is what the fed is trying to prevent.

Should they be? I don't think so.

[vaberella]

5. Exactly. All of this is to mitigate the fall out.

Bernanke and Paulson are known for this and you notice the Merril Lynch buyout is in the same scheme of things and props up investment into Merril Lynch helping the market. Currently I think there's a freeze though. n/t

[dkf]

6. That makes sense. Thanks.

[lapfog_1]

7. But when they accept more collateral from the security traders

doesn't the Fed risk becoming "junk bond" status themselves... i.e. instead of propping up the securities market, the securities market drags down the Fed. And if that happens, hello 1931.

[lapfog_1]

8. Why do I get the feeling that we are seeing a Wall Street version of this

http://www.boards.ie/vbulletin/showthread.php?t=2055050704&referrerid=59211