Buried financial news is unsettling

[unixronin]

Fed waives banking rules to allow CitiBank, BofA to loan more money through brokerage

Dislaimer:  I am not, nor have I ever been, an economist.  Nevertheless, this looks Bad to me, with a capital Bad.  This may be in part connected to BofA's recent $2 billion preferred-stock investment in Countrywide Financial, one of the biggest subprime lenders in the business (if not the biggest), which itself required a waiver from the Fed.  This new rules waiver allows BofA and Citibank to bypass the limit of 10% funding exposure, allowing them to loan up to $25 billion through brokerage — in Citibank's case, representing 30% of its total regulatory capital.

So, how serious is this rule-bending?  Very.  One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate.  This move by the Fed eats away at the principle.

(article pointed out by danjite)

Comments

[guppiecat]

It's relative bad.

See, the problem was in allowing the subprime risk takers to take as large a risk as they did. The core problem was the market manipulation to make the earlier recession seem less bad than it was. This led directly to both the housing bubble and the payday loan explosion.

Thus, we got into a situation where so many of the large lenders were invested in the subprime market that they took on more risk than they should have. Not surprisingly, this has blown up in their face.

However, what did surprise people is that so much of the lending capital is tied up in the high-interest and high-default-rate loans that there isn't enough out there to lend money to people with GOOD credit ratings.

What's going on now is an attempt to fix the problem by giving the banks more lendability. The theory is that the banks will lend with preference to those with high credit scores, and that by doing so, the coming economic crash won't impact the upper-middle and upper classes.

If this works out, I think that they're doing the right thing, and that it's bad with a lowercase 'b' because of the earlier risk-taking.

However, it's not terribly likely to work out, so you could well be right.

[fatcook.livejournal.com]

It's BAD. Because they won't learn not to make the same mistake again. Which will lead to more lenders defaulting, which will lead to more housing issues etc. The Fed should have not cut the overnight rate and let the market take the hit. Then it would have been over, it would have been ugly but it would have been short lived, 2-6 months. Now it's going to last for 8 months to 2 years, if not more.

[mrmeval.livejournal.com]

It took longer than I thought it would. I knew Alan Greenspan was the *only* reason the Fed worked for us. It's an ogliarchy by nature that only works to our benefit if you have a person running it that tells presidents and others to screw off and who has rock solid integrity.

[ithildae.livejournal.com]

The "bad" has already happened. When the Fed raised the interest rate back in 2000, triggering the recession, then cutting the rate to nothing, triggering the expansion. The banks are so overextended right now that they need the rule change to stay viable. The only real question right now is, "Pay me now, or pay me later." The whole fiasco is likely to cause significant pain, the only question is when, where and how much. The chances of getting out of the pain are slim, as they rely on men in authority at the banks and the Fed being able to put long term goals in front of short term gain.

To quote A. Einstein, "The level of thought that has brought us to this point, will be insufficient to take us past it."

[unixronin.livejournal.com]

I hear you. I think there's plenty of room for more bad, though, and I suspect that allowing the banks to pour more good money after bad in the middle of a collapsing housing bubble is only going to make matters worse in the long run.

[ithildae.livejournal.com]

Agreed.

[ithildae.livejournal.com]

This just in from Yahoo news link (http://biz.yahoo.com/ap/070829/expensive_homes.html?.v=2)

It seems that the subprime market has sucked the wind out of higher end mortgages gt $417,000.00. The rates on those are about 9%, if you can get them.

[unixronin.livejournal.com]

Yeah, currently in this area at least, "jumbo" mortgages simply aren't being funded, period.