Sunday, September 14, 2008

Fed Plans Expanded Lending Facilities

WSJ details the Feds role in the Lehman liquidation:

The Federal Reserve is expected to expand its lending facilities in the wake of the likely demise of Lehman Brothers, taking a wider array of securities, including equities, as collateral for its loans, say people familiar with the matter.

The moves, which potentially represent another landmark step in the Fed's efforts to address the deepening credit crisis, are expected to be temporary. They are meant to calm markets as they head into one of the most perilous trading environments in decades with Lehman's massive market positions on the verge of being unwound.
The key here is that this is likely another drawdown on Fed Treasury securities. In the last 12 months, Treasury securities are down by $300 billion. The Treasury only has $480 billion in Treasury paper remaining in its account. The drawdowns have occurred because the Fed has been sterilizing the capital infusions it has been making to Wall Street. That is, instead of printing more money, the Fed has been supplyng bailout funds by using its Treasury securities. At some point, if these bailouts continue, the Fed will be out of Treasury paper and money printing will begin in earnest.

And make no mistake about it, while Lehman, itself, is not being bailed out, Wall Street is. The expanded lending facilities will indirectly pay off those who hold demand obligations from Lehman and want out now. That's a bailout.

-Robert Wenzel

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