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.