U.S. Government: World's Biggest Investment Bank?

What happened this past weekend surely was historic and a real game changer. No, I'm not talking about the JPMorgan pouncing on opportunity, at the potential expense of the Federal Reserve via the Bear Stearns deal (As of November 2007, Bear had around $46 billion of MBS/ABS, Fed agreed to take the "most illiquid", i.e the worst $30 Billion of it). Far more monumental is the fleecing that the US investment banks have parlayed on the Federal Reserve.

The US government has effectively become a joint venture partner with the investment banks, one which though provides all, yes all of the upside to the investment banks, while giving the taxpayers nothing except for potential liability for future losses (yes I know technically the Fed is not the government, but they are responsible for printing Federal Reserve Notes (dollars) and those are fully backed by the US Government). The Fed has completely opened up their entire, theoretically limitless, balance sheet for the use of the investment banks, to use as collateral however they see fit in order to attempt to improve their profits (no not reduce losses, improve profits, just in the last week alone, we learned that last quarter, not year, right in the heart of the credit crisis, writedowns and all, Morgan Stanley checked in at $1.55 Billion in profits, Goldman made $1.5 Billion, and even supposedly shaky Lehman made $489 million). Listen to the words of the Lehman CFO herself as to what the Fed will now accept as collateral for the effectively limitless loans they will now provide to the investment banks;

"It's actually a very broad range of collateral...All BBB- assets or better, across all asset classes in fixed income"

"This is a fantastic decision, unprecedented"

Of course it is... for the banks. A government guarantee, literally achieved overnight! The potential ramifications are enormous.

If this works in terms of stabilizing the financial system and if we do not head into a serious economic downturn, then perhaps the Fed's gambit will work. Down the line then, the Fed simply withdraws the line or at tells the investment banks that they have to play by the same rules and regulations as the commercial banks, i.e. enjoy both the benefits and the responsibilities of a post-Glass-Steagall world. The solution perhaps ends up in between.

On the other hand, consider if the economic forces leading to a significant downturn are just too strong. Rather then letting market forces take their course in terms of investment banks, cleaning out the excesses and the weak, i.e. Drexel, E.F Hutton, and Salomon Brothers, the Fed might find themselves in a rather untenable situation, actually weakening the investment banking sector by artificially supporting excesses and the weak, and paying a potentially vast sum in order to make things worse. I thought that it was pretty well accepted that even the AAA ratings on many securities were at the least very questionable in some cases. The Fed is accepting collateral all the way down to BBB-! Further, they are doing this right into the teeth of an economic downturn. Quite a high stakes gambit by the US government!

Disclosure: No positions

Comments

[Britishsteel:]

Business as USUAL SOCIALIZE THE RISK AND PRIVATIZE THE PROFITS

2008 Mar 20 08:32 AM

[The GreatDe...:]

Thomas Jefferson was concise in his early warning to the American nation,
“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

2008 Mar 20 10:55 AM

[Tony Soprano:]

Since there is so much angst directed toward the Fed and the US Government, I decided to listed some events, not all of them, that had dramatic ramifications on lives, cost and the psychology of our country. I started in 1906 because it’s just a little over a hundred years. As I compiled the list, I could not help but feel the great sacrifices that many American’s have made and what a resilient country, economy and government we have in American.

The 1906 San Francisco Earthquake and fire, registered 8.25 on the Richter scale; estimates range from 700 to 3,000 dead or missing, approximately 225,000 injuries and $400,000,000 in 1906 dollars.

Recession, May 1907-June 1908, 13 mo

Recession Jan. 1910-Jan. 1912, 24 months

Completion of the Panama Canal, 1914 – 27,500 workers are estimated to have died

Recession Jan. 1913-Dec. 1914 23 months

World War I -- 116,708 killed – 33 billion

Spanish influenza, 1918, killed over 500,000 people in the worst single U.S. epidemic.

Recession Aug. 1918-March 1919 7 months

Recession Jan. 1920-July 1921, 18 months

Recession May 1923-July 1924 14 months

Recession Oct. 1926-Nov. 1927 13 months

The Great Mississippi Flood of 1927, flooded 27,000 square miles, 246 killed

The Great Depression, Black Tuesday, crop prices fell by 40 to 60 percent, after the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

The Dirty Thirties, longest drought of 20th century. Peak periods were 1930, 1934, 1936, 1939, and 1940. The "dust bowl" covered 50 million acres in the south-central plains during the winter of 1935-1936.

Labor Day Hurricane of 1935, 400 killed

Recession May 1937-June 1938 13 months

World War II – 408,306 killed – 360 billion

Wartime Controls: 1941-1945 rationed consumer items ranging from sugar to gasoline

Recession Feb. 1945-Oct. 1945 8 months

The Marshall Plan, July 1947 – 13 billion in economic and technical assistance were given to help the recovery of the European countries

Recession Nov. 1948-Oct. 1949 11 months

Korean War, July 1951 - July 1953 – 33,000 killed in action

Recession July 1953-May 1954 10 months

Recession Aug. 1957-April 1958 8 months

Recession April 1960-Feb. 1961 10 months

The Cold War, some estimates shows $8 trillion was spent, worldwide, on nuclear and other weapons between 1945 and 1996

The Cuban Missile Crisis, Oct. 1962

Good Friday Earthquake (1964) In Alaska, it was the fourth biggest earthquake recorded

Vietnam War, 1963 – 47,378 killed in action

The murder of JFK, 1963 Nov

The Gulf of Tonkin Incident, Aug 1964

The murder of Dr King, April 1968 and Bobby Kennedy, June 1968

The city riots of April, 1968 – 30 cities affected

Hurricane Camille, Aug 1969, 259 killed

Recession Dec. 1969-Nov. 1970 11 months

Stagflation of the 1970s began

Nixon first imposed wage and price controls on August 15, 1971

Oil Embargo, Oct 1973 long gas lines

Recession Nov. 1973-March 1975 16 months

Articles of Impeachment of Nixon started
(Approved by a vote of 27-11 by the House Judiciary Committee on Saturday, July 27, 1974.)

Deregulation: 1974-1992 this era began when Nixon left office

Three Mile Island nuclear power plant crisis, March 1979

Mount St. Helens eruption 1980

Recession Jan. 1980-July 1980 6 months

Prime reached unbelievable 20% in January 1981,

AIDS was first reported June 5, 1981 by the government – It is thought that more than one million people are living with HIV in the USA and that more than half a million have died after developing AIDS.

Recession July 1981-Nov. 1982 16 months

California earthquake 1983

The 87 market crash - Black Monday

California earthquake, 1989

Recession July 1990-March 1991 8 months

Iraq invaded Kuwait on August 2, 1990

The Persian Gulf War, 1991 or Desert Storm Jan 1991

Hurricane Andrew 1992 very destructive United States hurricane

The Great USA Flood of 1993

Intervention in the Former Yugoslavia,

Dot Com Bubble, climaxed on March 10th, 2000 with the NASDAQ peaking at 5132.52

9/11 Attack, 2,974 people died

Recession March 2001-Nov. 2001 8 months, Airline Industry Collapsed

Enron bankruptcy in late 2001, employed 22,000

WorldCom, July 21, 2002, filed for Chapter 11

Iraq War, March 19, 2003 – 4,000 dead

Hurricane Katrina, late August 2005, 1,836 people lost their lives

Start of the Great Housing Recession or Sub-prime Recession 2006 or 07, 08? Date to be determined.

2008 Mar 20 03:01 PM

[Bilbo:]

From out here, outside the USA, it's being observed that your country has gone, in 2 decades, from a powerful but beneficent nation to shambling wreck. Look at yourselves,,,,,Iraq - The Oil War fought for Dick Cheneys options in Halliburton, G W Bush - the Glove Puppet, a once major economic power now a net debtor to the the tune of $2 billion a day outgoing ,,,,,,,,,,and now this fiasco. We out here, in RealWorld are suffering due to the USA allowing lying, deceit and theivery to pass as "business as usual".

I used to love the USA from afar, but now I reckon you've blown it. If this shambles goes the distance to full blown global depression, the world will never trust you as a nation again. Quite frankly, USA, out here in RealWorld, you suck right now. And its your own fault.

2008 Mar 21 08:55 AM

[vodka_tonic:]

excellent article, i have been thinking the same thing myself, except i thought they were only accepting AAA/Aaa, did not know that they went down to BBB-, that's just crazy !!!
this is a very big GAMBLE ;)

2008 Mar 24 09:20 PM

[vodka_tonic:]

actually i just double checked and the collateral accepted has to be AAA/Aaa, nothing below. not sure were you are getting the BBB- from !!!

2008 Mar 24 09:25 PM

[Mark Wenzel_:]

Thanks for comments all! Apologize for delay on responding. Cheesecake, here is link (www.newyorkfed.org/mar...) to fed website which spells out that "investment grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities" will be accepted." Also, follow the link above the Lehman CFO's quotes. She directly states that BBB- and above will be accepted.

2008 Apr 03 02:24 PM