"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 letter."


This was precisely why we had Glass Stegal, to separate banking (safe) from securities (risk) industry This **** is going to take down the whole financial system.

Also, if this is correct (from suddendebt.com), hedge funds and other institutions can use their assets to get money, by going through one of the banks which has access to the discount window.

So we've basically screwed sound central banking, and are giving money to hedge funds and brokerages (via the Fed-approved banks) in exchange for borrower-determined-values of boat loans and BBB MBS.

The latter is confirmed from an email From: "FrbDiscountWindow@chi.frb.org" <FrbDiscountWindow@chi.frb.org>
To:
Sent: Friday, August 24, 2007 3:31:31 PM
Subject: Re: Discount Window Facility - Modifications to Margin Requirements


Sorry for the delay.

You are correct, a BBB rated MBS without a price will get the nonpriced margin.

The changes announced August 17 were designed to provide depositories with greater assurance about the cost and availability of funding. Maintaining existing margins helps provide that assurance, as the margins are a factor that affects the cost and availability of discount window credit.

Karl, regarding the letter to Dodd, in California, a few thoughts.

A California purchase loan on an owner occupied 1-4 unit home is non recourse. We can expand that benefit to the rest of the US by folding it into the bankruptcy code.

But we have other issues, namely that the majority of subprime loans are refis! Subprime lending actually LOWERS the homeownership rate by several million people, according to the Center for Responsible Lending. Thus, only a small fraction of homeowners would be affected by a change like this.

What would you propose in response to Dodd's call to keep people in their homes? I would tell him it's a bad idea. Keep people in homes they can afford, i.e. return them to the rental pool.

Dodd needs to recognize the value of renting for 35% of the population. There's a reason our long term homeownership rate is at 65%. Bringing it to 69% is not sustainable, as the high level of poverty, costs of repair/maintenance/taxes, and inability to stay in one location make renting a better choice for many households. So what's the problem for returning an indebted homeowner to a rental house? You can get a really nice rental for less money than a mortgage payment.

Finally, Dodd never talks about the people who've already spent their equity. He should at least mention that we have 2 groups of borrowers: those who were suckered into a loan they didn't understand at the top of the market, and those who lied on their applications or refinanced and had a nice party on $100K - $400K. I'd like to hear him talk about prosecuting some appraisers for appraisal fraud, the escrow people who helped commit this fraud, the lenders, the ratings agencies, investment bankers, and the deadbeat borrowers who lied on their applications and went on a big spending spree with that cash out refi.

Come on Dodd, can you just be real for once? No way in hell would I ever vote for you Dodd, with your coffers full from lobbyist money from financial services companies!

Here is what I found most interesting (it helps to actually READ the letters) :

This is what the Citibank wording said :

"Bank proposes to extend credit to market participants in need of short-term liquidity to finance their holding of CERTAIN MORTGAGE LOANS AND RELATED ASSETS."

The wording for Wachovia and BofA said that collateral being put up was mostly cash and treasuries. A bit of a difference there.

I think Gen has it pegged pretty well. This is EXCEEDINGLY DANGEROUS. The hedge fund dump MBS **** on the broker, the broker dumps it on ****ty-bank and when the hedgie and/or the broker goes***** up, the bank is left on the hook - having as much as 30 PERCENT of their capital in MBS.

And as Gen pointed out, each of these ****ing banks is on the hook to all of the others for TRILLIONS of un-regulated derivatives.

Yes, it might slide for awhile and yes, the Fed might step in and eat it and yes, there might be little pink ponies in my back yard when I wake up tomorrow morning - but I wouldn't bet on it.

Societies repeat their mistakes - look at all the Depression era legislation/regulation that has gone bye-bye in the last 10 years, the short uptick rule, Glass-Stegall, etc. People are stupid - they think because it never happened in their very short lives that it will never happen again.

If they had let things be, the hedgies and the weak brokerages would have gone under and we probably would have had a severe recession ... but now that they dragged the money center banks into this (or they dragged themselves) now everything is seriously ****ed - as in the best case scenario is only depression instead of complete system meltdown.

Seems like these banks (and the people who run them) are suicidal.

The Chinese could have been threatening to dump their MBS on the market at any bid and force everyone to mark to market instantly. Working through Citi they could give China a price they could live with on an unload. The Chinese are not above playing economic hard ball. I am sure the Chinese were not happy with all the bad press surrounding their holdings.

Fed bends rules to help two big banks 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. …

http://money.cnn.com/2007/08/24/magazine....

It's all pretty clear what's going on, they're grasping at straws here, and things won't just shove right off the cliff but they're heading that way with all due speed.

It's obvious what's going to happen, this isn't going to end with some.... whew that was close moment, that's just what they are deluding themselves with.

Right now some nervous people probably feel, whew that was close but it looks as if we've made it out.....

They need to watch the movie the Perfect Storm.... big wave, she's not going to let us out.

This is so so so obvious, the FED is acting weird, the markets are odd but that's all to be expected, once this starts playing out, expect the FED to resemble one of Custer's soldiers, multiple arrows in it, completely out of ammunition and dead.

During the fight though they'll throw all kinds of things at the Indians, rocks, dirt, whatever they can, wait for them to be sitting there with a nothing as they get run over by the problem.

That will be a good tell that we're there.

How are those letters different from the letters issued earlier this year? Seems like these exceptions have been granted to Wachovia before, also to BOA in Jan 06.

The important issue is not that these type of instruments have been issued before, rather it is the conditions prevailing in the credit markets and the Fed's previous actions with in the last three weeks that raise concern over their use of this tool at this time.

The issue isn't that they did it.

Its that they removed the safeties at a time of extreme market stress, and they did so with two of the primary broker/dealers with the greatest derivative exposure - 10x their enterprise value or more.

First rule of handling explosives - you don't take the safeties off when you're doing things that might cause them to go off.