Fed to Treasury: More Power!

The Treasury acts to put more 'top end' on the Fed's printing presses.


Treasury to Sell Bills to Bolster Fed Balance Sheet
By John Brinsley and Rebecca Christie

Sept. 17 (Bloomberg) -- The U.S. Treasury said it will sell bills to allow the Federal Reserve to expand its balance sheet, a day after the government agreed to take over American International Group Inc.

``The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve,'' the department said in a statement today. ``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program.''

Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.

The new bill program ``will provide cash for use in the Federal Reserve initiatives,'' the Treasury said.

The Treasury said it will sell the new bills using its existing auction procedures, giving ``as much advance notification as possible.'' The bills will not have a uniform fixed term, giving the Treasury the same duration flexibility that it has with cash-management bills.


NY Federal Reserve Bank
Statement Regarding Supplementary Financing Program
September 17, 2008

Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program.

The program will consist of a series of Treasury bill auctions, separate from Treasury's current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York.

Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.

TED Spread Rises to New High for the Credit Crisis

For an explanation and analysis see: Demystifying the TED Spread

Russian Stock Market Halts Trading After a 17% One Day Decline

Shock and awe.

Russia halts trading after 17% share price fall
By Catherine Belton and Charles Clover in Moscow
and Rachel Morarjee in London
The Financial Times

September 16 2008 19:11

Russian shares suffered their steepest one-day fall in more than a decade on Tuesday, losing up to 20 per cent, as a sharp slide in oil prices and difficult money market conditions triggered a rush to sell....

Russian Stock Markets Halts Trading After 17% Decline

So What's the Deal with the Fed?

Most news sites, taking their cue from the Fed NY Press Release, are reporting that AIG will be receiving a loan of $85 billion which will be paid back in two years with an interest rate of LIBOR + 850 basis points.

The loan will be collateralized by AIG's assets including its subsidiaries.

In return, the Fed will receive an equity interest of 79.9% of AIG immediately. It will have the right to suspend dividend payments to common and preferred shareholders. It will replace top management.

AND it owns and will maintain ownership of 79.9% of the company AFTER being paid back in full at a 10+% rate of interest over two years.

What, no penalty clause for prepayment?

Seriously, doesn't something seem a little wrong in that description? Who negotiated for the Fed? Tony Soprano?

Is it a purchase or a collateralized loan? The way people are describing it is a purchase for 79.9% of the company, and AIG repays the full purchase price to the Fed in two years for with 10+% annual interest, AND the Fed keeps the ownership.

We suspect the press release was written hurriedly and the newswires and bloggers are running with it without questioning what it really means, and details will be forthcoming.

We admit we do not understand the deal as it is being explained. It does not make sense. We suspect that the ownership is really warrants with either a strike price or exercisable upon some prearranged condition of non-payment.

The change in management can be a negotiated item in the note, and does not require actual majority share ownership control.

Its not a trivial question because it speaks to existing shareholder dilution and the stock price. We are sure Hank Greenberg knows the answer, but we can't seem to find his phone number.

But like everyone else we are tired and in news overload, so let's call it a night and let the market decide what's what.