The Fed’s Latest Give-Away

In the late 90s, I bought (thankfully only a couple thousand dollars) of Nortel stock. Needless to say, I took a bath on it. So I read this story by Tom Petruno and Maura Reynolds in the LA Times with interest:

In a surprise, the Fed said it would begin to temporarily lend major banks and brokerages as much as $200 billion in U.S. Treasury securities it owns, in exchange for mortgage-backed securities that in many cases have slumped in value because of market anxiety over soaring loan defaults.

With rock-solid Treasury bonds in hand, Fed officials hope, financial firms will return to something closer to normal investing and lending practices. That could ease the credit crunch that took hold with the housing market’s plunge last summer but since has spread to many unrelated corners of the banking system and economy.

Now, by agreeing to exchange Treasury bonds for mortgage bonds in temporary swaps with financial institutions — including brokerages such as Bear Stearns — the central bank is hoping to halt or even reverse the decline in the value of high-quality mortgage securities, analysts said.

Temporary… right. Because the bank and everybody else is going to ignore the hard fact that the carriage is turning back into a pumpkin in a few hours. The only way this is a “credible” plan is if the Fed makes the exchange permanent – in effect giving them money by exchanging Treasury bonds that have value for now worthless securities at the price the banks paid for those securities when they thought they had value. Put another way… it would be like reimbursing me for my losses in Nortel. Which is to say, a ridiculous thing to do, and one the Fed would never consider.

But it seems with banks its different. The magnitude of the Fed’s proposed help (i.e., give-away) has been slowly increasing, and these temporary swaps are merely the step before making them permanent. Everyone knows the swaps will become permanent because they can’t have an effect if they’re only temporary. And it won’t be enough, so more and more money will be pushed down that particular hole.

Whether in the end the Fed will ever put forth a give-away big enough to help keep the banks afloat, I don’t know. But they certainly won’t stop before ensuring that this guy’s retirement package is secure.