Another day, another plunge in the share of Lehman Brothers (LEH) which lost 40 percent of its value last week.
Ben Bernanke said on Tuesday that the Fed was considering keeping its lending window to investment banks (a.k.a. the Primary Dealer Credit Facility) open through the end of the year.
The Federal Reserve is strongly committed to supporting the stability and improved functioning of the financial system. We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets.
But last Thursday, Fed numbers showed that investment banks had reduced their borrowings to zero over the last week ending Wednesday. Earlier, I pointed to some research that questioned the lending windows' usefulness in reducing counterparty risk (as opposed to liquidity risk), which seems to be the biggest concern surrounding Lehman, and that's added to the "unusual and exigent circumstances." Given the current market fragility, is the investment banking lending facility helping all that much and what's the case for keeping it around in its current form?
UPDATE
Tony made a good point in the comments:
...having the window open means you are not likely to have a situation where a firm's liquidity lines get pulled and said firm collapses in overnight fashion.
It could very well be the case that the presence of Lehman's liquidity safety net has kept it around even despite the beating it's taken over the last couple of months. The paper I cite above by the Dallas Fed's Tao Wu finds that much of the rise in counterparty risk "can be attributed to heightened uncertainty regarding the macroeconomy, financial markets, and underlying mortgage default risk."
So perhaps the Fed needs to extend its liquidity window further.
This article has 3 comments:
it's also an admission by fed..which they won't acknowledge but anyone without a lobotomy knows..that they have failed their most critical mission which is the stability of the financial system.