Major U.S. Banks Step Up to Discount Window

Citigroup, JPMorgan Chase, Bank of America and Wachovia announced Wednesday they have each borrowed $500 million from the Fed's discount window. Deutsche Bank went to the window last Friday, the day the Fed announced it had lowered the discount rate to 5.75% from 6.25%. The discount window was originally set up as a means by which the Fed can assist struggling banks. Banks generally avoid it because of the associated stigma (indeed, shares of all five banks slipped temporarily on news they had gone to the window). The Journal notes that while the move was largely symbolic, the banks had an incentive to step up: the Fed gave them a temporary exemption from a restriction barring them from using discount-window funds to "finance certain securities purchases by their investment-banking units." "The Fed was playing DJ here, luring people out onto the dance floor," said Lou Crandall, chief economist at Wrightson ICAP. "The only way to eliminate the stigma of the discount window is to get prime institutions to use the facility." Robert Brusca, chief economist at FAO Economics, sees the move as a cover for banks that have nowhere else to turn: "Intermittent use of the window by large players will muddy up any attempted take on the amounts being borrowed by the truly distressed...My guess is that subterfuge is the real game plan."

Sources: Dow Jones I, II, Wall Street Journal, Reuters, MarketWatch I, II, Bloomberg
Commentary: As Mortgage Shops Close, Big Banks Are Looking Better and Better • Post Rate Cut: What Lies Ahead? • Why The Fed Rate Cut Was No Surprise
Stocks/ETFs to watch: C, JPM, BAC, WB, DB. ETFs: FDL, XLF, RKH, KBE
Earnings call transcripts: Citigroup Q2 2007, Wachovia Q2 2007, Bank of America Q2 2007, JPMorgan Chase Q2 2007

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