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

[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.