Fed bends rules to help two big banks

[EV_Ares]

If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America's biggest banks. Fortune's Peter Eavis documents an unusual Fed move.
By Peter Eavis, Fortune writer
August 24 2007: 5:09 PM EDT

NEW YORK (Fortune) -- In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed's web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed's discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.

On Wednesday, Citibank and Bank of America said that they and two other banks accessed $500 million in 30-day financing at the discount window. A Citigroup spokesperson declined to comment. Bank of America dismissed the notion that Banc of America Securities is not well positioned to fund operations without help from the federally insured bank. "This is just a technicality to allow us to use our regular channels of business with funds from the Fed's discount window," says Bob Stickler, spokesperson for Bank of America. "We have no current plans to use the discount window beyond the $500 million announced earlier this week."

There is a good chance that other large banks, like J.P. Morgan (Charts, Fortune 500), have been granted similar exemptions. The Federal Reserve and J.P. Morgan didn't immediately comment.

(entire article @ link)

http://money.cnn.com/2007/08/24/magazines/fortune/eavis_citigroup.fortune/?postversion=2007082417

[whistle]

1. This is doing nothing but raising the Bullshit Index for Wall Street...

...to make the claim that there is no problem in the credit markets. All is well now....maybe not!

Globally, $329 billion worth of private equity loans for planned takeovers are in question and more than half of that sum concerns five big banks alone:

o JP Morgan, $64.65 billion;
o Deutsche Bank, $32.11 billion;
o Citigroup, $25.44 billion;
o Bank of America, $24.25 billion;
o and Goldman Sachs, $19.57 billion.

Also, the following six banks are in the category of having $11.5 to $18.0 billion potentially on the ropes:

o Lehman Brothers,
o Credit Suisse,
o Royal Bank of Scotland,
o Morgan Stanley,
o Merril Lynch,
o and Barclays Capital.

All of these big banks wish to have their governments and respective tax payers eat the down-side risk associated with these highly risky ventures while they profit from the gains.