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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: NOW who wrote (75796)	3/9/2008 10:49:41 AM
From: KyrosL	Read Replies (3) of 116555

toxic collateral The premise of that whole diatribe is that the collateral accepted by the Fed for its loans is toxic. That is BS, to put it mildly. The lowest quality collateral the Fed is accepting is Agency securities with implicit Government guarantee. That is hardly toxic, unless people believe that the Federal Government will not honor that guarantee. What the Fed is essentially saying is that the Government (namely, the Fed!) WILL honor the guarantee. The reason for the expansion of the TAF, the long term repos, and the equalization of Treasuries and Agencies as collateral for Fed loans is very simple: in the last month and especially the last couple of weeks agency spreads over Treasuries increased to the highest levels since 1986. The Fed wants to end this, and since it theoretically can accept all Agencies in the world and replace them with Treasuries, it will succeed. PS. An obvious side effect of these Fed actions is that it provides banks with a new very profitable sideline, for as long as these actions last, to sore up their profits and give them time to figure out how to downsize and adapt to the new far more restrictive credit environment.

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