Morgenson: Trash for Cash
Gretchen Morgenson’s column in tomorrow’s NYT is a decent discussion of the creative lending facilities to which the Fed has resorted to help out troubled banks.
SAVING the nation’s financial system from reckless banks and brokerage firms is an enormous job, heaven knows. But somebody’s got to do it, so the Federal Reserve Board, with its taxpayer-funded balance sheet, stepped in.
To grease the gears of the nation’s seized-up credit markets, the New York Fed in recent months created three new lending entities. Together, they allow banks and financial firms to swap up to $350 billion of securities they cannot sell for cash or United States Treasuries.
The entities will stay in business as long as the markets for mortgage securities and other orphaned “investments” are closed, the Fed said. This allows institutions to exchange their trash for cash that they can turn around and lend to corporations or individuals.
The nature of these new Fed lending facilities is not without risks, of course. One of those risks is that taxpayers may have to cover losses if a firm or bank fails to repay a loan.