Thursday, March 20, 2008

What the Banks Want; the Banks Get - Fed Expanding Junk It Will Take In

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The past 9 days have truly been historic - no one can now say the Federal Reserve is not Wall Street's... err... umm... friend. (I was going to use a different term). On top of all the other things, word is now out that even lower quality paper will now be accepted by the Fed... and Wall Street is loving they are getting their way - Merrill, Morgan, Lehman - up 10% across the board... truly a new era the Federal Reserve has embarked upon in the past week and a half.

The Federal Reserve is starting to look like the junkyard in Sanford & Son - but are we really surprised? Anything for NYC Bankers. (I can only imagine what the folks at Bear Stearns must be thinking to see their brothers waited on hand and foot)
  • The Federal Reserve's first Term Securities Lending Facility (TSLF), to be held March 27, will be worth $75 billion and will expand on the types of collateral accepted, the New York Fed said on Thursday.
  • The expansion in the array of collaterals can further help primary dealers, TSLF's targeted borrowers, to repair balance sheets that have been slammed by mortgage-backed securities that soured during the housing slump.
  • In the debut TSLF auction, the Fed can now accept so called Schedule 2 collateral rather than the more narrow list of Schedule 1 collateral. Schedule 2 collateral includes agency collateralized mortgage obligations and triple-A rated commercial mortgage-backed securities, as well as previously announced private-label triple-A residential mortgage-backed securities, the New York Fed said. (triple A, wink wink - as in Ambak is triple A)
My favorite quote came from the Bloomberg story on same subject

The changes came after ``extensive consultation with market participants,'' the New York Fed said in a statement today.

Translation: Whatever they ask for, they get.

So up to now I have been pooh poohing the "Don't Fight the Fed" mantra but it's getting to the point that whatever the bankers want, the Fed will give. So as I stated yesterday, we might be nearing that stage with financials that we face with homebuilders - the news flow will continue poorly for months on end - the names will remain volatile with large swings up and down until everything is absorbed - then they will trade sideways for a long while.

I really need to get my own Federal Reserve - it is like having your own personal fairy godmother - they are here to make all our wishes come true. Now we only have 1 wish left to go - stop making us take the junk back on our balance sheet every 90 days and just buy it outright. Every other wish has been granted.

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