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December 13, 2007
The Fed and intangibles
On his New York Times Blog, Floyd Norris explains what the Fed did yesterday when it announced a new "term auction facility":
The Fed will lend money to banks based on almost any asset they own, even ones that are not liquid at all. That will include some of the more exotic loans and securities out there.
Investors, it appears, love it. The stock market opened sharply higher, reducing the losses that came yesterday after the Fed cut interest rates, but not by enough to satisfy Wall Street. This move is taken as evidence that central banks are determined to rescue the system, whatever it takes.
How much will the Fed lend against illiquid assets? It has a public list, already in use in discount window lending. You will note that it allows the lending of up to 85 percent of the face value of AAA-rated collateralized mortgage obligations, if there is no observable market value. There are some C.M.O.’s out there that have not yet been downgraded but that might not bring that much in a sale.
I’d love to see which assets are pledged, and how much the Fed lends against them. But the Fed won’t disclose those facts. Nor will it let us know which banks borrow using the new facility.
Intangible are not included on the current list of assets, however. The Fed will lend against Commercial and Agricultural Loans, Commercial Real Estate Loans, Construction Real Estate Loans, Family Residential Mortgages, Home Equity Loans, Consumer Loans- Autos, Private Banking, Installment, Etc., Consumer Loans- Credit Card Receivables, Student Loans, SubPrime Credit Card Receivables and Asset-Back Securities. It will be interesting to see if anyone asks them to lend against an intangible-backed loan.
Posted by Ken Jarboe at December 13, 2007 10:04 AM
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