Post by unlawflcombatnt on Aug 23, 2007 13:58:48 GMT -6
The latest moves by 4 large banks to borrow money at the Discount Window appears to be an attempt to obscure use of the Discount Windows by truly insolvent smaller banks. The reasoning is that if big, solvent banks use the discount window, than it's not necessarily a sign of insolvency when smaller institutions use the Discount Window. Thus, it removes the implication that smaller, truly insolvent institutions are insolvent just because they borrow at the discount window. Thus, this reduces runs on smaller insolvent banks, by reducing public awareness of their insolvency.
Below is an excerpt from a Market Watch story discussion this,
U.S. banking giants borrow $2 bln from Fed;
Citi, rivals borrow at higher rates to try to cut stigma of discount window
www.marketwatch.com/News/Story/us-banking-giants-borrow-2/story.aspx?guid=%7B512F004F%2D5A40%2D4F59%2DA20C%2D1F07D1F2395F%7D
By Alistair Barr & Rex Nutting, MarketWatch
8/22/07
"U.S. banking giants Citigroup Inc., J.P. Morgan Chase, Bank of America and Wachovia Corp. said on Wednesday that they borrowed $2 billion from the Federal Reserve as part of a new program set up last week to calm the creaking financial system.
Citibank, a unit of Citigroup...said it took out a $500 million, 30-day loan from the New York Fed's discount window program for its clients....J.P. Morgan , Bank of America and Wachovia said in a joint statement that they each borrowed $500 million, including some on a term basis, at the discount window.
The moves are the latest in a series of steps orchestrated by the Fed to relieve a credit crunch triggered earlier this year by problems in the subprime mortgage business. Some experts...said it could be an attempt to camouflage discount-window borrowing by a truly distressed financial institution.
The banks paid higher interest rates for the loans than if they'd borrowed the money elsewhere. Experts said they did that to try to reduce the stigma of tapping the discount window. In the past, if a bank used this source of borrowing, investors and depositors assumed the institution couldn't get a loan anywhere else. That, in turn, often made things worse by triggering runs on the bank and cutting off what market access the firm had left....
said Lou Crandall, chief economist at Wrightson ICAP, "The only way to eliminate the stigma of the discount window is to get prime institutions to use the facility."
Crandall and other experts said the move may be designed to provide cover for a smaller bank or financial institution that's really in trouble. If a smaller financial institution suddenly needed to borrow more money to avert a liquidity crisis, it may not want to alert the rest of the market by doing that extra borrowing via usual market avenues. Instead, the institution could supplement its regular borrowing with a loan from the Fed's discount window, Crandall explained.
"Intermittent use of the window by large players will muddy up any attempted take on the amounts being borrowed by the truly distressed," said Robert Brusca, chief economist at FAO Economics. "My guess is that subterfuge is the real game plan."
It's tough to find a real reason why the Fed is orchestrating such discount-window borrowing, other than as a symbolic move to try to calm markets or to provide cover for a distressed bank, said Joseph Mason, an associate finance professor at Drexel University's business school.
"No one wants to borrow from the discount window because showing up to borrow is a sign of weakness and investors then pile on and depositors run on your bank," Mason said. "The Fed is urging everyone to borrow something to take away that information."...
Still, lending money to truly distressed institutions hasn't helped in the past, according to Mason, who has studied the history of financial crises.
The fundamental problem with a bank that's in trouble is usually that its liabilities are too high relative to its assets, he explained, noting that when liabilities exceed assets an institution is technically insolvent. Borrowing just increases liabilities, which in turn increases the likelihood of insolvency, Mason said.
"Few institutions borrow from the discount window and those that really need it are the ones that you don't want to give it to - those that are on the road to insolvency"....
"these problems will be drawn out for some time," Mason warned.
Below is an excerpt from a Market Watch story discussion this,
U.S. banking giants borrow $2 bln from Fed;
Citi, rivals borrow at higher rates to try to cut stigma of discount window
www.marketwatch.com/News/Story/us-banking-giants-borrow-2/story.aspx?guid=%7B512F004F%2D5A40%2D4F59%2DA20C%2D1F07D1F2395F%7D
By Alistair Barr & Rex Nutting, MarketWatch
8/22/07
"U.S. banking giants Citigroup Inc., J.P. Morgan Chase, Bank of America and Wachovia Corp. said on Wednesday that they borrowed $2 billion from the Federal Reserve as part of a new program set up last week to calm the creaking financial system.
Citibank, a unit of Citigroup...said it took out a $500 million, 30-day loan from the New York Fed's discount window program for its clients....J.P. Morgan , Bank of America and Wachovia said in a joint statement that they each borrowed $500 million, including some on a term basis, at the discount window.
The moves are the latest in a series of steps orchestrated by the Fed to relieve a credit crunch triggered earlier this year by problems in the subprime mortgage business. Some experts...said it could be an attempt to camouflage discount-window borrowing by a truly distressed financial institution.
The banks paid higher interest rates for the loans than if they'd borrowed the money elsewhere. Experts said they did that to try to reduce the stigma of tapping the discount window. In the past, if a bank used this source of borrowing, investors and depositors assumed the institution couldn't get a loan anywhere else. That, in turn, often made things worse by triggering runs on the bank and cutting off what market access the firm had left....
said Lou Crandall, chief economist at Wrightson ICAP, "The only way to eliminate the stigma of the discount window is to get prime institutions to use the facility."
Crandall and other experts said the move may be designed to provide cover for a smaller bank or financial institution that's really in trouble. If a smaller financial institution suddenly needed to borrow more money to avert a liquidity crisis, it may not want to alert the rest of the market by doing that extra borrowing via usual market avenues. Instead, the institution could supplement its regular borrowing with a loan from the Fed's discount window, Crandall explained.
"Intermittent use of the window by large players will muddy up any attempted take on the amounts being borrowed by the truly distressed," said Robert Brusca, chief economist at FAO Economics. "My guess is that subterfuge is the real game plan."
It's tough to find a real reason why the Fed is orchestrating such discount-window borrowing, other than as a symbolic move to try to calm markets or to provide cover for a distressed bank, said Joseph Mason, an associate finance professor at Drexel University's business school.
"No one wants to borrow from the discount window because showing up to borrow is a sign of weakness and investors then pile on and depositors run on your bank," Mason said. "The Fed is urging everyone to borrow something to take away that information."...
Still, lending money to truly distressed institutions hasn't helped in the past, according to Mason, who has studied the history of financial crises.
The fundamental problem with a bank that's in trouble is usually that its liabilities are too high relative to its assets, he explained, noting that when liabilities exceed assets an institution is technically insolvent. Borrowing just increases liabilities, which in turn increases the likelihood of insolvency, Mason said.
"Few institutions borrow from the discount window and those that really need it are the ones that you don't want to give it to - those that are on the road to insolvency"....
"these problems will be drawn out for some time," Mason warned.