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

[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.