The Fed Discount Window Dressing Continues

by: Yankee Group

By Carl Howe

I wrote about the Fed's public relations play last week at the discount window, where four major banks each borrowed half a billion dollars they didn't need at disadvantageous rates to shore up credit market confidence. Personally, I'd think such unbusiness-like behavior would discourage investors. But given such unprofessional behavior, I speculated that US Treasury Secretary Paulson had engineered the big bank borrowing as a marketing play to hide actual bail-outs of smaller institutions.

Well, guess what. The Wall Street Journal Friday featured a page 3 article titled Banks Pare Borrowings From Fed Window. And in that article, we get some very interesting clues to what is going on:

Borrowing from the Fed's discount window dropped to $1.101 billion as of Wednesday, about half the $2.001 billion level reported a week earlier, the central bank disclosed yesterday.

The change suggests the Fed has managed to calm markets even though banks haven't taken its strong encouragement to borrow at the discount window.

As a credit crisis deepened two weeks ago, the Fed cut the rate on the loans it makes directly to banks by half a percentage point, to 5.75% -- which still is above the rate at which banks can borrow among themselves in the market, roughly 5.25% -- and extended the period for loans from one day to 30.

Last week, four big banks borrowed $500 million each to support the Fed's efforts to rebuild confidence in the system. At least some of those banks have repaid some of those loans, the Fed numbers indicate.

Average borrowing during the week was $1.315 billion, up $115 million from a week earlier. A year ago, the average weekly borrowing was $52 million under the Fed's primary credit program.

What a surprise. Two major banks decided that that Fed discount window was a bad deal and paid back their loans. But what's more interesting is that there's another $101 million that isn't accounted for in two banks repaying their $500 million loans. $2.001 billion minus $1 billion does not equal $1.101 billion.

The bottom line: the Fed can declare mission accomplished: Through clever marketing, it managed to hide a $100 million dollar bailout of some unnamed financial institution during the last week before Labor Day. But no one should imagine that anything has changed with regard to the credit crisis we had last week -- it's still there. And it will remain there until someone in the government figures out that it is going to have to do more than window dressing and bailout hiding to regain our confidence.