Banking Breadline: The Discount Window

Want to see something really scary? The Fed has recently expanded an open door (actually a window) policy for institutions that are in need of some help. In what resembles a modern day breadline, we are seeing banks lining up to take advantage of this generous offer in record numbers.

From Economy.com:

Total primary credit jumped to $10.34 billion as of Wednesday, up from the prior week’s $579 billion and its largest since September 2001. Total borrowings at the discount window averaged $45.14 billion compared with last week’s $33.48 billion. Banks are lining up at the discount window to obtain cash. The Fed has slashed the discount rate by a full percentage point since the beginning of the year, narrowing the spread with the target rate to only 25 basis points.

investor (a.k.a The Ostrich Market) or the belief that all of the data is already priced into these markets.

Before answering, also consider the fact that on Thursday, the American Bankers Association reported:

Late payments on a group of consumer loans increased to 2.65 percent in the October-December quarter, up from 2.44 percent in the July-September quarter. It was the highest level since the first quarter of 1992, when the economy had just emerged from a recession.

The icing on this chocolate covered angel-food cake, which represents our hopes for a quick economic recovery, is about to melt away if the employment report on Friday is anywhere near what analysts predict. If we tick beyond the 400,000 mark and at or above a 5% unemployment rate, that hope may actually turn out to be a poison filled devils-food cake (see full Eco-commentary).

Add the the final ingredient of the downbeat sentiment of the consumer and investor and we may finally see a correction that is well overdue. Our markets seem to be running on fumes and that will not last for long if we continue to get pounded with bad news.

Stocks to look at if employment rate is worse than estimates: Capital One (COF) , Proshares 2X Inverse (SKF).

Charts: Economy.com

Disclosure: Horowitz & Company clients are SHORT COF.

Comments

[DSX Lover:]

Nobody is lining up at the Banking Window to obtain cash. Out of those $33.14 Billion $30 where lend to JPM Morgan, for the BSC takeover. If you take down $30 from $45.14 Billion thats a miniscule 15.14 Billion, that Banks have borrowed from the Discount window which is nothing compared to total US Debt of $48 Trillion. Banks have excess liquidity, and whoever is borrowing is doing so in order to take advantage of low rates, with Commercial Bank Funding being reduced to less than 2% which is what they are paying on CD's now, the Discount window is not really an option, or a need for them. Investment banks are in a different category, because they're structure is different, so they can borrow from the discount window, and buy Fixed Income securities that yield more than double the cost of funds.

2008 Apr 04 11:04 AM

[deefree:]

giving an investment banker access to the Fed window is like giving a crackhead access to a cocaine mine

2008 Apr 04 04:59 PM