While the federal government remains firmly committed to no more bailouts (except Freddie Mac and Fannie Mae, grrr), Bernanke is throwing the industry a life ring of sorts… If you read through to the last paragraph of the Federal Reserve’s press release for Sunday, September 14th, you will stumble upon the announcement that Section 23A of the Federal Reserve Act has been put on a temporary hiadeous. This temporary exception from the regulations in Section 23A will expire January 30, 2009, unless extended....
Investment banks usually borrow money from day to day to keep things running. Investment banks use to package a bunch of home loans together and sell those to investors as mortgage-backed securities. The individual monthly loan payments would then go to the investors, creating a constant flow of cash. As a wave of foreclosures swept across the nation, the individual monthly loan payments have not been coming in to give value to any of those mortgage-backed securities; do to the abundance of foreclosures all mortgage-backed securities are being treated as nuclear waste.
In short, Section 23A of the Federal Reserve Act regulates loans, purchases of assets, and certain other transactions between an insured depository institution and its affiliates. In this case, this change in the regulations is aimed to help the investment banks. With the rules being relaxed for financial institutions it will allow the savings side of a large corporation (the same savings institutions where you do your personal banking) to lend money to the investment side of the operation. In the past this sort of in-house lending was constrained; but now lending back and forth is permitted without collateral.
Ted Truman, at the Peterson Institute (also a veteran member of the Federal Reserve Board) says “Think about it as a family. There are probably limits on how much you should lend to your brother or your sister. But under emergency circumstances, you relax those limits and you lend to your brother or sister." He goes on to explain, “The catch is that if the brother or sister can't pay the loan back, the whole family could go bankrupt. This isn't just a problem for the banks, because the money the savings bank is loaning out is actually your savings. Those savings are backed by the FDIC, Federal Deposit Insurance Corporation. But if the FDIC runs short of money, it will be backed by the federal government. The federal government, in this case, equals you, the taxpayer.”
If bending the rules is all that is necessary to jump start our economy then I am all for it; however we cannot look over the origin of restrictions against in-house lending, the Great Depression. Congress built a firewall between the investing and saving arms of financial firms in order to guard against another contagious collapse. While I am not screaming “BOMB!” when it could just be a car back-firing, I am weary of the abuse or corrupt practices that people’s personal savings will be subject to.
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