Better Than the Greenspan Put

What stopped the slide in US stock prices? Can you say "Plunge Protection Team"...?

The FEDERAL RESERVE is subsidizing risk-taking by the biggest New York institutions by continuing to lend money generously, writes Dan Denning of The Daily Reckoning Australia...

   Indeed, it's getting hard to keep up with the number of ways Ben Bernanke is lending to other banks, to investment banks, and to primary dealers.

   There's the Term Auction Facility, first set up in Feb. and used to such great effect to help J.P.Morgan buy Bear Stearns. The Fed announced Monday it would be auctioning off another $50 billion in 28-day loans. All depository institutions eligible to borrow under the Primary Dealer Credit Facility (the investment banks) can borrow from the TAF too, if they like.

   And who doesn't want easy money from the Fed?

   On April 3rd, Bloomberg reported that the Fed's lending to securities firms rose to $39.1 billion. This was on top of about $7 billion per day to traditional banks through the discount window.

   So is it any surprise the US stock market has stopped crashing? The Fed has put in a psychological floor. It's better than the Greenspan Put!

   Data from the St. Louis branch of the Fed show just how much Fed lending to US banks and primary dealers has increased.

   
Bernanke's "innovative and flexible" response to the banking crisis has also spawned the Term Securities Lending Facility (TSFL). Starting 27th March, the Fed is lending prime brokers – i.e. the big New York banks who buy and sell for hedge fund speculators – up to $200 billion in US Treasury bonds.

   The banks deposit with the Fed some kind of collateral stamped "AAA-rated" – starting with residential mortgage backed securities (RMBs), plus agency debt issued by Fannie Mae and Freddie Mac, the government-sponsored US home lenders.

   The Treasury bonds they receive can then be used, of course, to raise fresh loans of cash...ready to extend credit to the banks' hedge fund clients. And where does the money go? Judging from what's happened to the US stock market, back into stocks.

   So far, it certainly doesn't seem to have reached the housing market or mortgage-backed bonds.