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To: yard_man who wrote (51599)	12/27/2000 2:24:28 PM
From: accountclosed	Read Replies (1) \| Respond to of 436258

i wouldn't think that the collateral meant that much. the fed isn't concerned about agencies on a seven day basis as far as being credit worthy if you can read a lot into that <g> when 9b is added to banks reserves, banks can lend out many many times that amount in loans. like 20 or 30 or whatever the current reserve rates are. in fact they can loan out more than whatever the math tells since some of the money loaned out (to customers in checking accounts) doesn't leave the bank usually. so if reserve requirements are say 5% of loans you get more than a 20 times effect. why are they necessary? well again, not being the biggest bond guru...they seem to do their work with temporary reserves much of the time...rolling them over and over and over, until they take the plunge and make a permanent addition to reserves. that is one mistake that people make often on this thread. they look at overnight or 7 day repos and believe they are permanent reserves. repos are temporary injections of liquidity into the system. and when the securities are repurchased, the fed does another repo if they want the same level of liquidity in the system. i think they do what they have to do most of the time to keep interest rates where they want them in the federal funds market. if banks need reserves due to demands on them by customers, they borrow from each other on the books of the fed in the federal funds market. the fed monitors the pressures in that market place and does what it has to do to keep rates where they want to, usually within targets established by the fomc. i think often they don't want to let the rates get out of whack even temporarily, but they don't want to commit to permanent action every time they make a move.

To: yard_man who wrote (51599)	12/27/2000 2:28:59 PM
From: accountclosed	Read Replies (1) \| Respond to of 436258

why do the banks do all this? for the spreads. they make markets to their clients, i.e. institutions and high net worth individuals. they have the product in inventory credited to their customers accounts. if they need reserves, they sell either for their own account or on behalf of a client and they scoop up spreads and commissions. the bond market is way larger than the stock market. they have books just like a nyse specialist and are constantly doing transactions for spreads and for settling their own account at the fed in terms of reserves.