if we ever get the permit.

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When will it be enough?

When will it be enough?

by Anthony Cherniawski, The Practical Investor, LLC | May 20, 2008

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May 15 (Bloomberg) – “The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.” Is this a good thing, as the article implies? Banks are eager to borrow “cheap money” from the Federal Reserve because there isn’t any to be had elsewhere. Many financial institutions that are painfully aware of their own bad paper and losses are unwilling to trade paper in the commercial markets due to general distrust among themselves. (“Maybe their paper is more toxic than our paper.”) Instead of money (IOUs) flowing freely between institutions, these IOUs have become the sludge that gums up the works because there is no market for it. The only source of funds is now the Federal Reserve Board, who is growing more concerned about their inability to keep the banks afloat.

The Feds had their first “NET MISS’ on May 14th. That means that their own reserves were inadequate to meet projected requirements. Fed holdings of U.S. Treasury securities fell $22.3 billion for a daily average of $520.1 billion. The central bank had about $713 billion of Treasuries two months ago. It may mean that even the Federal Reserve may not be able to meet the growing demand for funds by banks. That may be why Bernanke is urging the banks to attempt to get additional capital from outside investors by selling stocks or financing through bond issues.

The Fed is doing its part by auctioning treasury securities to firms so that buyers can raise capital. The problem is that they are auctioning these treasuries to investment firms, not banks. Since when is the Federal Reserve supposed to bail out investment firms? Are they perhaps sticking their finger in yet another hole in the dike to stem the floodwaters?

Here’s what Forbes had to say, “Wanting to avert a broader panic that could endanger the entire U.S. financial system, the Fed agreed last month to temporarily let investment firms obtain emergency loans directly from the central bank - a privilege previously limited to commercial banks. The decision marked the broadest extension of the Fed's lending authority since the 1930s.” Haven’t they done enough already?