Friday, March 21, 2008

Investment Firms’ Money Grab

In the wake of the Bear Stearns bailout by the Federal Reserve, now other investment banks are tapping the Fed for emergency loans. There is some good – and some bad - in this. The good is that hopefully these loans will help stabilize the investment banking industry, which got rocked by the collapse of the mortgage market and the virtual collapse of Bear Stearns.

The bad – these same investment bankers aren’t being held accountable for their investing mistakes and mismanagement of their businesses.

While I understand one of the reasons for the existence of the Fed is to protect this industry and keep the country’s financial well being stable, it does seem unfair that smaller businesses not involved in banking have to sink or swim on their own.

I’m not saying that the government should save everybody. My point is, people that run these investment firms, who probably made millions or billions on their investments when things looked rosy, should be somehow financially accountable for the company’s losses. With the Fed bailing these people out, there is no incentive for these same people to do any better in subsequent investments, since it’s not their own money they’re using. My guess is that the biggest culprits in this mess were the hedge fund managers – a group of people who are virtually unregulated in how they operate. If the Fed is loaning these people money to help their businesses survive, I think the least we can do is ask them to install some oversight to prevent future collapses.

Here’s the Associated Press Release on the investment loan situation:

Investment firms tap Fed for billions By JEANNINE AVERSA, AP Economics Writer
Thu Mar 20, 5:40 PM ET

WASHINGTON - Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported Thursday.

The lending is part of a major effort by the Fed to help a financial system in danger of freezing.

Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.

The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Goldman Sachs, Lehman Brothers and Morgan Stanley said Wednesday they had begun to test the new lending mechanism.

On Wednesday alone, lending reached $28.8 billion, according to the Fed report.

The Fed created a way for investment firms to have regular access to a source of short-term cash. This lending facility is seen as similar to the Fed's "discount window" for banks. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed, in another rare move last Friday, agreed to let JP Morgan Chase secure emergency financing from the central bank to rescue the venerable Wall Street firm Bear Stearns from collapse. Two days later, the Fed backed a deal for JP Morgan to take over Bear Stearns.

Thursday's report offered insight on how much credit was extended to Bear Stearns via JP Morgan through the transaction the Fed approved last Friday. Average daily borrowing came to $5.5 billion for the week ending Wednesday.

Separately, the Fed said it will make $75 billion of Treasury securities available to big investment firms next week. Investment houses can bid on a slice of the securities at a Fed auction next Thursday; a second is set for April 3.

The Fed will allow investment firms to borrow up to $200 billion in safe Treasury securities by using some of their more risky investments as collateral.

By allowing this, the Fed is hoping to take pressure off financial companies and make them more inclined to lend to people and businesses.

The housing collapse and credit crunch have led to record-high home foreclosures and forced financial companies to rack up multibillion losses in complex mortgage investments that turned sour.

In the past day and weeks, the Fed has taken extraordinary moves aimed at making sure that problems in credit and financial markets do not sink the economy.”

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