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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ahhaha who wrote (8587)	12/13/2007 8:34:07 AM
From: robert b furman	Respond to of 33421

Hi ahha, The federal reserve requires all member banks to "deposit" a certain percent of the local banks deposits to their regional Federal Reserve Bank. These deposits are calculated daily as bank customers write draw and use inter fed bank funds as the honor checks and other monied vehicle ie cashier checks. When a bank doesn't have sufficient deposits held at the fed - they impose a "penalty" or interest rate surcharge on those deficient funds. This surcharge is called the discount rate - it is a penalty rate. If the fed dropped the penalty rate then unbridled lending (leverage) would have no curtailment (financial penalty). This arrangement goes way back to the days when entrenched east coast banks and European banks feared that west coast banks would get too powerful (leveraged) and bring about a collapse or run on the banking system and they (east coast banks)would be penalyzed for the overleveraging of the west coast banks. Read "The Creature from Jeckyl Island" and you'll know why the fed doesn't want to drop the discount rate. Instead these collateralized debt obligations which are viewed as toxic are frozen.Anyone holding them (many tech companies that are rich in cash by the way) are whistling past the cemetary hoping like heck to turn this bad paper back to the issuing banks upon expiration. This has caused the back up that just keeps getting bigger and has tied up the banks assets - they keep rolling in. The feds answer is to recognize them as collateral and make offsetting funds available at an auctioned bid for interest rate. This is a brilliant work out as the toxic debt will turn into cleaned and tradable commercial paper thus opening up the blocked commercial paper,cdo,siv's,mortgage backed paper whatever you want to label them. Note that mortgage backed paper is getting a higher rate in NY and it appears this is the most toxic (per a past post). Not only will this clear up the US banks ,but it has been mirrored by the othercentral banks that have the same problem. Make no mistake the banks that sold the junk will still get hung with it-that will take time to earn out or not. Pardon my use of negatives in past posts. My intent was to get the problem and its nature out to those who are confused about the entire scenario - not write a perfect post. As for your assigning blame to what out Universities teach - The World is full of educated derelicts -many are at Universities NO DOUBT. The truly smart people usually end up in business. They also have the common sense to avoid what these educated people throw at them in what they perceive as enlightened education. The fed will not give the banking system a free pass to over leverage their deposits.This is the creation of money and you can bet they (all central banks)prefer to keep their finger on that switch - thus why I called it a big NO NO NO. Take that to the bank Ahha. Pardon any poor sentence construction and/or mispelled words as I've got a day job to get to. Hope this clears up my past miscommunications.<smil> Bob