Fed Creates the Dealer's Dole, Affirms Croney Socialism

The Fed cuts the Discount Rate by 25 basis points, and creates a new lending facility for the banks to lend to the brokers to be called the Primary Dealer Credit Facility (PCDF) aka the Dealer's Dole or Aid to Dependent Millionaires.

Press Release
Release Date: March 16, 2008

For immediate release

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.


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Primary Dealer Credit Facility
Terms and conditions

Frequently asked questions

Primary Dealer Credit Facility: Frequently Asked Questions

What is the Federal Reserve’s Primary Dealer Credit Facility (PDCF)? Why are we introducing the PDCF and what are some of its terms?

The Primary Dealer Credit Facility (PDCF) is an overnight loan facility that will provide funding to primary dealers in exchange for a specified range of eligible collateral and is intended to foster the functioning of financial markets more generally.

Who can participate?

Eligible participants include all the primary dealers. They will participate through their clearing banks.

What are the terms of the loan?

Loans will settle on the same business day and will mature the following business day. The rate paid on the loan will be the same as the primary credit rate at the Federal Reserve Bank of New York. Currently, this rate is equal to the primary credit rate. In addition, primary dealers will be subject to a frequency-based fee after they exceed 30 days of use within the first 120 business days of the program. The frequency-based fee will be based on an escalating scale and communicated to the primary dealers in advance.

What is the rate of the loan?

The rate of the loan is the primary credit rate at the Federal Reserve Bank of New York, currently 25 basis points above the target federal funds rate.

What is the frequency-based fee and how is it determined?

The frequency-based fee is a fee schedule that will specify additional fees to be charged to dealers who access the facility on more than 30 business days out of 120 business days of the facility. Access to the facility on the 31st and subsequent days will result in additional fees to be paid by the dealer. The exact frequency-based fee schedule will be determined in consultation with the primary dealers and will be announced within 10 days.

What collateral is eligible for pledging?

Eligible collateral will include all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Open Market Trading Desk, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities for which a price is available.

How will collateral be valued?

The collateral will be valued by the clearing banks based on a range of pricing services.

How do primary dealers initiate the loans?

Primary dealers should contact their clearing bank to request PDCF funds no later than 5:00 p.m. Eastern Time on business days.

How much can primary dealers borrow?

A primary dealer will be allowed to borrow up to the margin-adjusted collateral they can deliver to the Federal Reserve’s account at the clearing banks.

How and when are the loans and collateral settled?

The loans will be made available to a primary dealer’s clearing bank following the acknowledgment by the clearing bank that sufficient collateral has been placed in the New York Fed’s tri-party account at the clearing bank. This will take place around 5:00 p.m. each day.

What is the duration of the loans made under the PDCF?

All loans are made for a duration of one day. New loans can be taken out each day.

How do the primary dealers know that their requested borrowing has been fulfilled?

Each primary dealer should contact their clearing bank directly.

Is this lending with recourse?

Yes, loans to primary dealers made under the PDCF are made with recourse beyond the collateral to the primary dealer entity itself.

What are the differences between this and other recent initiatives?

The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible Depository Institutions to borrow at the existing Discount Rate for up to 90 days.

Will the PDCF operations have a reserve impact?

Yes, the credit advanced to the primary dealers under the PDCF will increase the amount of bank reserves.

How will we offset the reserve impact of PDCF loans?

PDCF loans made to primary dealers increase the total supply of reserves in the banking system, in much the same way that Discount Window loans do. To offset this increase, the Federal Reserve Open Market Trading Desk (the “Desk”) will utilize a number of tools, including, but not necessarily limited to, outright sales of Treasury securities, reverse repurchase agreements, redemptions of Treasury securities, and changes in the sizes of conventional RP transactions.

How is this different from discount window lending to depository institutions?

This differs from discount window lending to depository institutions in a number of ways. Currently, the primary credit facility offers overnight as well as term funding for up to 90 calendar days at the primary credit rate secured by discount window collateral to eligible depository institutions. The PDCF, by contrast, is an overnight facility that will be available to primary dealers (rather than depository institutions) for a period of 120 business days. The PDCF is subject to a frequency-of-usage fee, and the loans will be secured by a different basket of securities than those eligible for pledging at the discount window; in particular, only priced securities will be accepted in the PDCF.

What information regarding PDCF loans will be released to the public and how frequently?

Similar to loans made to depository institutions via the Discount Window, information on PDCF borrowing will be made available each Thursday, generally at 4:30 p.m., on Federal Reserve Statistical Release H.4.1 - Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks. The H.4.1 release will contain the total amount of PDCF credit outstanding as of the close of business on the prior business day and the average daily amounts for each week.

Under what legal authority are PDCF loans made?

PDCF loans are made under Section 13(3) of the Federal Reserve Act.

How long will the PDCF be in operation?

The PDCF will remain in operation as long as is needed to provide funding to primary dealers in exchange for program eligible collateral and to foster the functioning of financial markets.


2008 Monetary Policy Releases

Last update: March 16, 2008

J. P. Morgan Buys Bear Stearns for $2

J.P.Morgan says deal will 'ulitmately' be positive to earnings, in the same sense that the sun will ultimately become a blackened cinder.

They're only paying $238 million for them. Bear's headquarters is probably worth about $1.6 Billion. So you figure out what a mess they are in. Yikes!

J.P. Morgan Chase to buy Bear Stearns for $2 a Share

By Anne Stanley
Last update: 7:16 p.m. EDT March 16, 2008

SAN FRANCISCO (MarketWatch) --
J.P. Morgan Chase has agreed to buy Bear Stearns [s:bsc] for $2 a share in a stock-swap deal, according to a report in the online edition of the Wall Street Journal citing people familiar with the matter.

J.P. Morgan will exchange 0.05473 shares of its common stock per one share of Bear Stearns stock. Both boards have approved the transaction. The Journal reported people familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading.

The Journal report quotes Treasury Deptartment spokeswoman Michele Davis as saying, "None of these things is done until they're done. But I think everyone's expectation is sometime in the early evening hopefully" the deal will be done

Can the Fed Bail Out a Non-Bank?

The point about the Fed's power to backstop a deal from a bank to a non-bank is an interesting one we had not thought about, although we did point out Bear's non-bank status in our 'smoking gun' piece when we noted it does not appear on any of the OCC lists of banks with large derivative exposure.

The secondary point about four governors approving without including the fifth governeror Mishkin is only interesting if he were to object.

This will be a first in a series of tests of the boundaries of the Fed's power to intervene in US markets. This is not analagous to the LTCM situation where the Fed merely arranged the deal. In this case the Fed holds all the counterparty risk for JPM, and is really the principal with JPM acting as its agent.

The real test, the real 'crossing of the Rubicon' will be when the Fed exhausts its own asset side of its balance sheet, expressed as the Fed Held portion of the H.41 report. A few more deals like this and they will be there. What they do next, what new linkup they provide, will be where we cross the Rubicon from the existing Federal Reserve system to the netherworld of a purely whimsical form of money beyond even the discipline of the public debt markets.

Housing Group Challenges Fed's Bear Stearns Deal
By REUTERS

Published: March 16, 2008 Filed at 1:07 p.m. ET

WASHINGTON (Reuters) - A housing and fair lending activist group has challenged the legality of the Federal Reserve's quick approval of financing for Bear Stearns via JPMorgan Chase , questioning the Fed's authority to approve the deal because it involves a non-bank institution.

Inner City Press Community on the Move, in a complaint filed with the Fed late Saturday, called the central bank's brokering of the deal "entirely illegal" and anticompetitive, and questioned whether sufficient Fed members had voted for it.

In a first step toward challenging the bailout, Inner City Press questioned the legality of the Fed approving the deal without public notice, on the grounds Bear Stearns "is not a banking holding company and does not own a bank."

The Fed approved financing to Bear Stearns through JPMorgan in an emergency meeting Friday morning.

It was the Fed's first rescue of a broker since the Great Depression and its latest effort to soothe financial markets roiled by fallout from rising mortgage defaults.

But Matthew Lee, executive director of Inner City Press, vowed to take all needed legal actions against the deal.

"The Fed has hit a new low with this, they did nothing to protect consumers from predatory lending and now their response is to bail out one of the most notorious enablers of predatory lending with no benefit to struggling consumers," said Lee.

"This should be taken as far as it can go to finally bring the Federal Reserve to account that they work for the public interest and not only Wall Street, particularly in a time of crisis," he told Reuters on Sunday.

The Fed could not immediately be reached for comment.

Inner City Press, a nonprofit group that has challenged the nation's key bank mergers over the past decade in an effort to ensure poorer communities are served fairly, also questioned why only four of the five Fed governors approved the measure.

The Fed approved the deal between JPMorgan and Bear Stearns under Depression-era laws allowing it to do so under "unusual and exigent circumstances." This provision, however, requires an affirmative vote of not less than 5 members of the board.

At present, there are only five members on the board with two vacancies, but only four approved the measure because governor Frederic Mishkin was not present, according to the Federal Reserve.

But current law mandates that no less than five members can vote on the matter and states that members can be contacted through any electronic means, including by telephone and e-mail.

"There has been no showing that, given technology in 2008 (as opposed to the 1930s when this language was enacted), the required attempts to contact Gov. Mishkin were made," Lee wrote in the complaint.

Inner City Press also questioned whether the deal could be finalized without antitrust review.

"Third, to allow this relation between the nation's third largest bank and fifth largest brokerage, without any antitrust review, even with the required votes (which the Fed) did not have, is unlawful," the complaint stated, requesting public hearings on the matter.

The complaint also asks for a probe into Bear Stearns' disclosure of its financial condition, citing an interview the firm's chief executive gave on CNBC television earlier in the week during which no mention of the scope of the firm's financial troubles were made.

(Reporting By Joanne Morrison; Editing by Tim Dobbyn)

Paulson "Will Do Whatever it Takes"

Indeed, Paulson will do whatever it takes to bail out his friends on Wall Street. The price for this will be paid by all holders of the US dollar.


Paulson Says He'll `Do What It Takes' to Calm Markets
By Brendan Murray

March 16 (Bloomberg) -- Treasury Secretary Henry Paulson said the U.S. will ``do what it takes'' to maintain confidence in financial markets and defended the bailout of Bear Stearns Cos. as ``the right decision.''

``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said in an interview in Washington on the ``Fox News Sunday'' television program. ``I think we made the right decision.''

Paulson, 61, spoke two days after the Federal Reserve was forced to give an emergency loan to Bear Stearns, the fifth- largest U.S. securities firm. The move failed to avert a crisis of confidence among Bear Stearns customers and shareholders, who drove the stock down a record 47 percent.

In separate appearances today, the former chairman of Goldman Sachs Group Inc. called the rescue ``the right decision'' and expressed ``great confidence'' in Fed Chairman Ben S. Bernanke. Paulson said that in the case of Bear Stearns, the risk to financial stability outweighed his concern about so- called moral hazard, in which investors come to expect government rescues.

``I really understand the moral hazard argument,'' he said. ``On the one hand, you've got moral hazard and on the other you've got what's right for the markets, what's right for the stability of the financial system and the U.S. economy.'' (this Republican administration has the moral sensitbilities of a billy goat. - Jesse)

Bear Stearns Talks

Paulson said ``conversations are going on over the weekend'' about Bear Stearns. ``I'm very involved in those conversations.'' He declined to be specific about the future of the 85-year-old firm, the second-biggest underwriter of U.S. mortgage bonds, or say whether any additional government steps are planned.

``The government is prepared to do what it takes to maintain the stability of our financial system,'' Paulson said. ``Our focus, our No. 1 priority, is the stability of our financial system.''

The Treasury chief refused to say what a growing number of economists have concluded -- that the economy has entered a recession.

``Economists are going to be debating that for months and months,'' he said. ``It's much less important what you call it than what you're doing about it.''

The Standard & Poor's 500 Index is down 12.3 percent this year, while the dollar is down 5 percent against a basket of currencies of major U.S. trading partners. Home foreclosures in January and February year were up 58 percent from the first two months of 2007.

Faith in Institutions

``I've got great confidence in our financial markets and our financial institutions,'' Paulson said. ``Our markets are resilient, are flexible. Our institutions -- our banks and investment banks -- are strong.'' (Sounds like the CEO of Bear Stearns the day before his company rolled over - Jesse)

Paulson repeated his support for a ``strong dollar,'' and said the long-term strength of the U.S. economy would be reflected in the country's currency. (Anyone who believes this anymore is a simpleton - Jesse)

President George W. Bush is scheduled to meet tomorrow with his Working Group on Financial Markets. Paulson chairs the group, which includes Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

The Bush administration has resisted the use of government funds or guarantees to stem the surge in foreclosures. Paulson has brokered a series of voluntary accords among lenders to freeze interest rates on subprime loans and negotiated a one- month moratorium on foreclosures.

`Fragile' Markets

A credit crisis that began in August has left markets ``more fragile than we would like right now,'' Paulson said in a separate interview on ABC News's ``This Week'' program. ``My concern is to minimize the impact on the broader economy.''

Paulson said the administration doesn't support measures in Congress to help struggling homeowners.

House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd offered a plan last week to let the Federal Housing Administration insure refinanced mortgages after lenders reduce principal to help struggling borrowers.

The two lawmakers are leading congressional efforts to tackle the surge in foreclosures, which reached record levels in the fourth quarter of 2007. Their plan goes beyond the Bush administration's approach that relies on voluntary agreements between lenders and loan servicers to modify mortgages for borrowers who can't make their monthly payments.

``I'm looking very carefully at any proposal, but all the ones I've seen call for much more government intervention, raise more problems, do more harm than do good,'' Paulson said in the ABC interview.

Greater Oversight

Paulson last week proposed that U.S. regulators heighten their scrutiny of lenders, mortgage brokers and debt-rating firms to prevent a reoccurrence of the credit crisis roiling capital markets. Writedowns from subprime securities will probably rise to $285 billion, Standard & Poor's said in a report March 13.

``This has become the Bush recession,'' Senator Charles Schumer, a New York Democrat, said on the Fox News program. ``The president's hands-off attitude is reminiscent of Herbert Hoover,'' who led the country from 1929 to 1933.

Bush, under fire from Democrats who say he's doing too little to help homeowners facing foreclosure, yesterday said he won't be stampeded into ``bad policy decisions'' that might harm the economy.

``The market now is in the process of correcting itself, and delaying that correction would only prolong the problem,'' he said in his weekly radio address. ``I believe the government can take sensible, focused action to help responsible homeowners weather this rough patch.''

To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net
Last Updated: March 16, 2008 11:44 EDT