Amongst the financial news today is something that is truly strange and new. For the first time in almost a century, the Federal Reserve has announced it will lend out money in exchange for equities (shares of stock). According the the Reuters’ report:
“One of the biggest changes the Fed made was to accept equities as collateral for cash loans at one of its special credit facilities, the first time that the Fed has done so in its nearly 95-year history.
One of the most striking new Fed action was its decision to accept equities as collateral for cash loans under its Primary Dealer Credit Facility for investment banks. Until now, collateral was limited to investment-grade debt securities.”
What does this mean? Essentially, that the quality of the collateral held by the Federal Reserve is continuing to deteriorate. Long gone are the days of AAA rated collateral requirements. The Federal Reserve is now potentially the largest player in the stock market. At the very least, it will be subjected to stock market risk, a scary thought. Is this the role of a Central Bank?
The action is summarized by Nouriel Roubini as follows:
[T]he Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities.” http://www.rgemonitor.com/roubini-monitor/253567/if_lehman_collapses_expect_a_run_on_all_of_the_other_broker_dealers_and_the_collapse_of_the_shadow_banking_system