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Thread: The Fed as a bank

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    Veteran Member person's Avatar
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    Default The Fed as a bank

    Let's look at the Fed's consolidated balance sheet ... The Treasury holdings will go down and be replaced by an assortment of GSE and private label securities. The Fed's risk exposure will jump higher, and significantly so.
    http://suddendebt.blogspot.com/2008/03/fed-as-bank.html

    Haven't heard any US market news this weekend, except

    Bank of America Corp., the second biggest U.S. bank by assets, may take a record $6.5 billion provision in the first quarter to cover possible future losses in its home equity and mortgage portfolios, Punk Ziegel and Co. analyst Richard Bove wrote.
    http://www.bloomberg.com.au/apps/new...Ly4&refer=home
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: The Fed as a bank

    slowly but surely, the 'toilet paper' loans held by investment banks are being de-facto transferred to the Fed i.e. the US taxpayer.

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    God/dess Deogol's Avatar
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    Default Re: The Fed as a bank

    I got some loans I wouldn't mind just getting some money for. I know I won't ever see that money again. Unfortunately I am not politically connected enough I guess. Just a commoner you know.

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    Senior Member Blackstone's Avatar
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    Default Re: The Fed as a bank

    Quote Originally Posted by Melonie View Post
    slowly but surely, the 'toilet paper' loans held by investment banks are being de-facto transferred to the Fed i.e. the US taxpayer.
    "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices"

    More seriously, this is surely a good thing. The biggest problem in our economy is lack of liquidity. Essentially, banks don't have money to loan. Additionally, we have been dependent on foreign capital which is no longer so easily forthcoming. It sucks that tax money is being used to subsidize poor decisions made by private banks, however, the alternatives are worse. Also, the federal reserve is at least partly responsible for this mess; they relaxed restrictions on the resale of securitized debt 10 years ago, and now we have this housing mess as result.

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    Default Re: The Fed as a bank

    The biggest problem in our economy is lack of liquidity
    unfortunately, a whole lot of financial experts (that aren't connected with the gov't at any rate) will tell you that the biggest problem in our economy is a lack of SOLVENCY !!!! The liquidity issue is just a side effect.



    Also, the federal reserve is at least partly responsible for this mess; they relaxed restrictions on the resale of securitized debt 10 years ago, and now we have this housing mess as result.
    to be technically correct, US dep't of HUD policy under the Clinton administration, and the passage of various federal laws allocating federal tax money to assist in procuring mortgage financing for low income urban residents (and imposing penalties on banks if they did not write said mortgages), is arguably responsible for the deluge of delinquent subprime mortgages the banks are currently dealing with.

    (snip)"Miss Kaptur said the Bush administration wants to turn Section 8 vouchers into a block-grant system, doled out to the states to distribute instead of having the federal Department of Housing and Urban Development dealing directly with local entities.

    Critics say the block-grant system would substantially cut money housing authorities receive, making tenants pay more for rent and discouraging property owners from offering rentals to the Section 8 program.

    Miss Kaptur said community development blocks grants, some of which are given to neighborhood organizations for housing, have been cut nationally since 2001 from a little over $5 billion to $4.67 billion in the 2005 budget.

    "Those cuts will come right back to Toledo," Miss Kaptur said.

    Larry Gaster, executive director of the Lucas Metropolitan Housing Authority, said his capital and operations budgets have been cut annually, preventing him from making some needed improvements to LMHA facilities.

    Mr. Gaster said a new program that allows low-income residents to use their vouchers to get home mortgages is helping 30 families buy homes. He said 28 others have used home purchases through Section 8 vouchers to move off vouchers completely.

    The Bush administration is advocating such a movement, from public assistance to home ownership, through the American Dream Down Payment Act, passed in 2003. The act is meant to assist low-income families with down payments."(snip)

    from

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    Default Re: The Fed as a bank

    Quote Originally Posted by Deogol View Post
    I got some loans I wouldn't mind just getting some money for. I know I won't ever see that money again. Unfortunately I am not politically connected enough I guess. Just a commoner you know.
    Hahahahaha - I have been thinking for a while that I'd like to sell some loans. And if I don't have enough borrowing, I'd like to borrow some more and sell that too. Then when no-one on earth will lend me more that I can sell and not repay, I'd like to write a book about how I did it and how you can too.

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    Default Re: The Fed as a bank

    Arguing solvency vs. liquidity seems like arguing the chicken vs. egg conundrum. Many people/businesses/etc would be solvent if they had access to funds, and banks would have money to give out if so many corporations weren't insolvent and failing pay their banks.

    The issues with subsidized housing aren't anything new. Anyone who has taken intro-to-economics can tell you that any subsidy or production incentive will lead to a market glut (absent intervening externalities). Americans seem to favor home ownership heavily through both incentives and favorable tax treatment. An interesting writeup on it was in the Atlantic several months ago:
    http://www.theatlantic.com/doc/200712/real-estate/2

    I'm not sure how a re-organization of section 8 solves this. It's clearly a big-government anathema; the federal government is not the appropriate apparatus for distributing rental housing for low-income families, but, that mostly just results in bizarre allocations of low-income housing vouchers.

    The problems, to me, seem to be multi-part. First, housing loans were securitized and resold immediately. This means that banks had very little incentive to actually check to make sure you weren't overbuying; they were passing on your mortgage to someone else. The fact that they were securitized meant that no-one gave a rats ass if each individual mortgage was going to pay, and collectively, none of the issuing banks had an incentive to loan prudently. This was not legal until the late 1990's, as a result of legislation promoted by chairman Greenspan (he still thinks it was a good idea).

    Second, interest rates were artificially low after 9/11. This was unavoidable; consumer confidence was low. However, it gave the opportunity for most people to buy a cheap house with low interest. Also, it allowed the big wall street banks like Bear Stearns to leverage themselves much more than they normally could.

    These two factors were compounded by the compensation structure in investment banking, which overrewards short term gains at the expense of long term stability. The I-bankers need to rework their compensation layout, such that there is an incentive to allocate investment funds in areas that will provide both short and long-term returns.

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    Default Re: The Fed as a bank

    ^^^ At actually went far beyond that ! In a nutshell ...

    After the Clinton administration came into office in 1993, Clinton's HUD director established a policy to encourage / increase minority home ownership. The first stumbling block was the difficulty of low income urban residents to receive approval on mortgage loan applications, primarily because the vast majority of low income applicants A) did not have a sizeable down payment, B) did not have a suitable credit rating, and C) the urban location presented an elevated insurance / loss risk.

    The first step in implementing the new HUD policy was for the gov't to institute a grant program which 'handed' block grant tax money to low income urban residents as a down payment subsidy. But the lenders were still reluctant.

    So the next step was the enacting of laws / regulations against 'redlining' i.e. the gov't forcing lenders to write X percent of total loans for low income urban mortgage applicants as a 'public service' obligation linked to the lender's service territory. This DID force the approval of more 'shaky' mortgage loans to low income urban residents, but it also deteriorated the lenders' balance sheets and prompted a cutback in business and other loans due to the X percent linkage.

    So the next step was for HUD and other gov't agencies to create a conduit whereby lenders who were 'forced' to write 'shaky' home mortgage loans could offload the risk associated with those 'shaky' loans, a.k.a. could resell those 'shaky' loans to a secondary market. Fannie Mae / Freddie Mac regulations were changed by the gov't to provide some degree of assistance in this regard. Private institutions were also encouraged to join in, eventually leading to the secondary mortgage / mortgage backed securities market that we have today.

    It is therefore very arguable that the degree of subprime loan defaults that have recently been experienced is a DIRECT outgrowth of former gov't policies designed to increase low income urban home ownership ! The same gov't of course is now discussing options to 'bail out' such low income homeowners, i.e. proposing an expensive (to taxpayers) solution to a problem which the very same gov't created in the first place !

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