6 Questions on the Relationship Between Investment Banks and the Fed

I would like to ask a few questions to those of you who are listening to the bullish case presented by Humungous Bank & Broker.

1. When was the last time in history that the Federal Reserve Bank of New York had to bail out Wall Street, as it did a couple weeks ago with Bear Stearns (BSC)? At the beginning of the Great Depression in 1932.

"A 1932 provision of the Federal Reserve Act allows the Fed to lend to non-banks if at least five of its seven governors approve. That provision was last regularly used during the Great Depression. It is meant to underscore that the central bank should lend to non-banks only in extreme circumstances."

2. Which investment bank is widely believed to be the next weakest on Wall Street, after Bear Stearns? It is Lehman Brothers (LEH). Lehman Brothers sits on the Board of Directors of the Federal Reserve Bank of New York.

As I understand it, the Federal Bank of New York has, in the past month or so since the latest lending facility was created by the Board, lent almost $200 billion (about half its balance sheet, which used to be fully liquid and hence a tool for monetary policy) to Bear Stearns and Lehman Brothers, accepting in return illiquid securities, the very type that almost crashed Bear Stearns when no other bank would buy or lend against them.

3. Which investment banks started the humungous share buy-back of its own treasury shares at the peak of the equity market cycle in 2007? Lehman Brothers. Then Merrill Lynch (MER). Do you recall my blogs to the effect asking why any investment bank would buy their stock at the top and not the bottom of the cycle? Do you recall me telling you why I thought it was happening? I said they were using shareholder capital to buy the stock from Friends & Family and the best clients who would return to the table after the shares had plummeted. Well, surprise, surprise.

Bill Cara: Week #17 (2007-04-28) in Review [FINAL]
The share buy-back says it all. The shorts are being squeezed. .... A week ago, Lehman Bros and Merrill Lynch rocketed +8.2 pct +6.7 pct, ...
billcara.com/archives/2007/04/week_17_20070428_in_review_ini.html

Bill Cara: Week #18 (2007-05-05) in Review [FINAL]
Two weeks ago, Merrill Lynch rocketed +6.7 pct, whereas a week ago it was down -2.1 ... The shareholders have spoken: they like the share buy-back. ...
billcara.com/archives/2007/05/week_18_20070505_in_review_ini.html

4. Which banks, among others, are now refusing to permit clients to withdraw cash from their “near cash” accounts that had been represented as being liquid securities? Lehman Brothers and Merrill Lynch are clearly there in the lead.

5. If a person cannot pay collateralized debt, and as a consequence will be thrown out of their home by their banker, would that person be so inclined to repay their banker the principal and interest owing on uncollateralized debt in the form of credit card debt? Millions have been evicted, and tens of millions of Americans are now sitting in homes that have less cash value than mortgage obligation. In effect, renting would be cheaper, but the banks won’t let them unless they declare bankruptcy. But can they go bankrupt now with the new bankruptcy laws and get off the hook with the bankers?

6. After these problems in credit markets happened, because of errors in judgment by bankers, how much in total did the bankers pay themselves year-end bonuses out of capital (not from profits because the write-downs have eliminated (or will soon) most of those profits? Thirty-eight billion. How much did those investment banks borrow from the Fed last week alone just to stay solvent? Thirty-eight billion.

DC, do you really think the public doesn’t get it?

Comments

[Hard Facts]

Bill, Please!!! Stretching to make your point I think. Conspiracy theories like this give too credit to Wall Street firms for forethought.

[deefree]

Last 2 Fed Reserve CMBS for Treasuries indicate rising demand to dump paper for cash--at higher interest rates

Release Date: April 8, 2008
For release at 10:00 a.m. EDT

On April 7, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.820 percent

Total propositions submitted: $91.569 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.83

Number of bidders: 79

Bids at the stop-out rate were prorated at 67.70% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on April 10, 2008, and will mature on May 8, 2008. The stop-out rate shown above will apply to all awarded loans.

Release Date: March 25, 2008
For release at 10:00 a.m. EDT

On March 24, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.615 percent

Total propositions submitted: $88.869 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.78

Number of bidders: 88

Bids at the stop-out rate were prorated at 98.87% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on March 27, 2008, and will mature on April 24, 2008. The stop-out rate shown above will apply to all awarded loans.