Comment Making these lending facilities permanent could be viewed as setting up a “permanent easing bias.” This is worrisome unless the Federal Reserve slams the brokers with new regulation, as Michael Lewis explains in the next comment.
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The Wall Street Journal – Merrill Chief Opens Up on Fed Window
Thain Says New Rules for Securities Firms Are Needed if Facility Stays Accessible
We need a new set of rules,” Merrill’s new CEO said Tuesday at The Wall Street Journal’s second annual Deals & Deal Makers conference, where he was peppered with questions about the Fed lending facility. Merrill has tested it but not used it as a source of cash for day-to-day operations. Securities firms got access to the Fed as a result of the mid-March implosion at Bear Stearns Cos. The move was one of the broadest expansions of the Fed’s lending authority since the 1930s, and it gave brokerage firms from Merrill to Goldman Sachs Group Inc. the power to borrow from the Fed on much the same favorable terms as banks.
Comment Be careful what you wish for Mr. Thain. Michael Lewis said it well in his latest Bloomberg column (which was included in yesterday Newsclips):
Another related trait is the near total absence of stigma attached to risk takers who lose large sums of money. There’s status to be had from huge trading losses: The guy who lost the fortune must know something or he would never been put into the position to lose it.
Brian Hunter breaks a world record, blowing through $6.8 billion betting on the direction of natural-gas prices at Amaranth Group Inc., then turns up a few months later, inside his new hedge fund, running other people’s money.
No, once the government guarantees the debts of a big Wall Street firm it must inevitably also seek to control the risks that firm runs. And so while the bailout of Bear Stearns may seem like a gift to the big Wall Street firms, it’s really not. Limit the risk that these firms run and you also limit the sums of money they can make.
For some time now the action has been moving out of the big Wall Street firms and into hedge funds. The quality of financial information, and the ability to act on it, is better outside the big firms than inside of them, even, it now appears, when the information concerns one of the big firms. (The Security and Exchange Commission’s investigation into the run on Bear Stearns that preceded the crash has identified three alleged culprits and two of them are hedge funds: Citadel Investment Group and Paulson & Co.)
That trend is about to accelerate, as the golden age of the Wall Street investment bank draws to a close. The glorious 25- year run of these firms will have ended not with a bang, or a whimper, but with a government guarantee.
And the investment banker himself will have taken the final step on the journey to becoming, in all but name, the worst thing he can imagine being: a commercial banker.
Dow Jones – Citi CEO Calls For Debate On Financial Services Regulation
“Every institution has the right to lose all the money they want, but no-one has the right to impose their disfunctionality on others in the system,” he said, adding that an uneven application of rules can only make the threat of system risk worse. Pandit pointed to the recent unprecedented opening of the Federal Reserve discount window to non-bank dealers, a move, which if it had taken place a month earlier, could have helped Bear Stearns Cos (BSC) in its final days when its capital base was depleted. “But by definition, unprecedented events set a precedent. And regardless of whether that window is officially opened or closed, the market now assumes that it will be opened if necessary on an ad hoc basis. This is a hot topic of debate in the U.S. as you can imagine,” Pandit said.Comment Mr. Pandit, see above.