Fed bails out banks
Mon Aug 13, 2007 14:41

Fed bails out banks

August 11, 2007 – Yesterday the Federal Reserve purchased $38 billion in mortgage debt from leading banks in an effort to prevent a much needed correction and crash of the artificially supported stock market. The Federal Reserve calls it adding reserves. In total, the Fed added a total of $87.5 billion to banks' reserves at the Fed this week – a page straight from the Plunge Protection playbook. By saying that it added something to banks' reserves implies something of value, when actually, the Fed simply added $87.5 billion of high-risk debt to its cooked books.

The instrument the Fed used to bail out the banks is called a repurchase agreement. Basically, the Fed purchased $38 billion worth of securities collateralized by high risk, subprime mortgages from Wall Street’s largest investment banks such as Goldman Sachs Group and Merrill Lynch. The agreements imply that the counterparties are obliged to buy the securities on Monday, August 13, 2007. Which specific banks were bailed out has remained undisclosed – but is of great interest.

Subprime mortgages are loans made to borrowers that do not qualify for market interest rates. Because of the high risk of default, subprime mortgages have higher interest rates. In today’s mortgage market – most subprime mortgages also carry adjustable rates. As the Fed has raised interest rates over the last two years – the monthly payment requirement on these loans has increased – the driving force behind the current record-breaking number of foreclosures across the nation.

With the nation’s largest banks now holding significant amounts of paper on delinquent and defaulted mortgages, and virtually no venture investors willing to assume the risk of these loans in the current market, the interest rates banks were charging each other to borrow money rose above 6% on Friday. Without the Fed bailing out the banks, the interest rate banks charged each other would have continued to rise. Panic on Wall Street would have increased, and the stock market would have, and should have crashed.

The Fed had targeted 5.25% as the rate of interest banks should be paying one another – so plus 6% was a warning that credit was becoming too difficult to obtain for the banks. Just like subprime mortgages – the banks are higher risk borrowers now because of the volume of high-risk and bad debt they wrote and now hold.

But unlike the homeowner that is in foreclosure with no relief in sight, the Fed came to the rescue of the banks by announcing a three-day repurchase agreement of mortgage-backed securities. This move injected cash into the banks, albeit only for 1 business day. On Monday, the banks will have to repurchase its high-risk debt. At what rate the Fed is charging these banks has yet to be disclosed.

In summary - the banks are higher risk borrowers as a result of their own predatory leading practices. Because of the higher interest they are charging each other to borrow money, the confidence in and of the financial markets in the present overall market was decreasing to a degree that was causing panic with investors. By injected $38 billion into the banks yesterday, the banks that were on the receiving end of the cash did not have to borrow from one another – just for today. A stock market that should have probably dropped 500 points yesterday closed down 31.14. Independent financial analysts put the actual value of the stock market at 8000 or below – not the fake, inflated, manipulated 13000 to 14000 that is reported by the corporate insiders.

Meanwhile, no similar relief is on the horizon for the anticipated 2 million home foreclosures in the next 6 to 12 months – nor should there be. However, when the Wall Street elite is able to protect their own while 2 million families lose their homes – something is terribly wrong – and that thing is the entire fiat money system that is the Federal Reserve.

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Ed Haas via e-mail.

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