Monday, 15 December 2008

The Fed Secrets

The Federal Reserve bank of the United States is, in theory the biggest bank in the world, since it is the central bank of the biggest economy in the world. This bank, currently chaired by Ben Bernanke, monitors the economic activity of the USA, and is supposedly the regulating body of the markets. Although, this sometimes can be challenged, and the Fed is not exactly a good samaritan.

Before I dive into why that is, there is something important to mention, which was brought to my attention by my former professor, Ian Angell, in his book "The New Barbarian Manifesto".

Rating Agencies.

Rating agencies such as Moody's and S&P , are agencies that rate credit. This is important because it allows investors to assess whether a certain institution is likely to default on its debts. It is of particular importance in tough times, because its a good indicator for investors. The weird thing about these times, is that rating agencies seem to have acquired considerable power influence, because they also rate treasury bonds. You know the AA, AAA, B ratings etc... But the trick here is that when Moody's rate treasury bonds, its as if its rating a country, whether the country/government will default on its treasury bonds. Now that's like a private institution rating a country. Well, in retrospect, can't that pass as to be such a powerful institution that it can affect how governments are perceived by the internation community? That's quite a thing...

Anyway, the reason the Fed isn't exactly a good Samaritan, is for example, they do tend to keep secrets, like who they are giving aid to. Check this . The issue about this is that when a Central bank doesn't reveal who it is dishing out aid to, its affecting the transperancy of markets, as well as their operation, because when a company needs aid, its really an indicator that they are in trouble, and when someone is in trouble its usually reflected on the stock price, and investor confidence, and may dilude investors into investing in a dying company.

Which is unfair.

But a small story, is that the Fed often has favoritism, and we all know that the world is not really fair (haha that's a laugh), and people often favor people.

At least Bear Stearns know that. There is something called a discount window, which allows banks to take money from the Federal Reserve with a reduced interest rate, to service debts for a short period to avoid a liquidity problem. This is open for commercial banks, because commercial banks, although technically less active on the lending and investment scence for business, are crucial because they hold the people's money : savings, running accounts, etc., and if any of the commercial banks go into liquidity or financial troubles this can mean big trouble on an individual scale, because this doesn't mean that business will be affected, but directly the individuals, and not one or two, but thousands, if not millions. Imagine if Bank of America went bust, and all its customers lost their money, or part of it. That means riots, toppling of governments, demonstrations, big big trouble because that's going directly to the people. If an i-bank goes bust, the government can still somewhat handle the bankcruptcy without huge trouble, because hardly anyone will be instantly fucked. i.e. investors and business will probably go bust and employees fired, but imagine if 100,000 people no longer could afford to eat the next day, because their bank accounts were cleaned out. Lots of trouble.

Anyway, the discount window was , exceptionally open to investment banks, because the crisis was so grave, they just had to do it. Although, because of an old quarrel, and the reputation of Bear Stearns being the sharp elbowed rebels of Wall Street, the Fed only opened the discount window for the i-banks, after Bear Stearns (or stare burns like my friend now calls it), was already finished, and could not benefit from the discount window.....

Goldman Sachs and Morgan Stanley, were more lucky than that, and managed to benefit from this move, although, this came at a pretty high cost, because the Fed forced them to convert into retail banks. This move, brings them within a realm of more strict regulation and less freedom in investment and sell-side activities.

At least the Bear guys would never have to say "Hi, and thank you for calling Goldman Sachs. How can I help you today? Would you like to hear about our new mortgage deal?"

hehe. Live free or die fighting.....

MS retail bank

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