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August 22, 2007
Why did the four large banks borrow from the Fed?
The NY Times reports:
With the four largest U.S. banks and a major international bank having borrowed from the Fed through the central bank's discount window, others may be more willing to follow, analysts said.
"The psychology is, if a bank needs to borrow from the discount window, and they think there's a stigma attached to it, they can say, 'Citi has done it, too,"' said Robert Albertson, chief strategist at Sandler O'Neill in New York.
Tyler Cowen cleverly responds:
Imagine that you, as a smart person, went around saying stupid things, in an attempt to limit discrimination against the stupid. You can come up with other analogies of your own.
That's true up to a point. But there's also the fact that no single one of those banks would have wanted to do it alone. No one wanted to be the first to the buffet table with the whole room watching, so the host gently nudged some good friends to go up together. Plus, the banks' motivation is not as altruistic as Tyler's analogy would suggest.
In other news today, Bank of America announced that it was buying a $2 billion equity stake in Countrywide. (NY Times)
Under terms of the deal, Bank of America, based in Charlotte, N.C., acquired $2 billion in the form of nonvoting, convertible preferred stock yielding 7.25 percent annually, Countrywide said.
Let's be clear. Bank of America isn't financing this deal (or even part of it) with borrowed reserves that need to be paid back in 30 days. This is more of a long term decision. However it is interesting that these events happened on the same day. Interesting in the sense that it reaffirms my belief that these four banks, of which Bank of America is one, are not borrowing from the Fed because they are in trouble. King Banaian (SCSU Scholars) agrees and writes
I'm reminded of the Knickerbocker crisis of 1907, when NYC banks did act as a lender of last resort before there was a Fed.
They are trying to show their confidence in the system. How far that will go remains to be seen. Whether others will follow also remains to be seen. But let's remember too that J.P. Morgan didn't organize the 1907 rescue of the banks out of charity. And in the movie It's a Wonderful Life, Potter wasn't selling, Potter was buying. We need to remember that the four banks that borrowed aren't doing something for nothing. They simply didn't want to do it alone. Perhaps today there are no Morgans and no Potters who can do it alone, and perhaps that's a good thing. There's liquidity out there. It just needs to keep circulating. Both of today's tangentially related events show that it is possible.
And that is a good thing.
Posted by William Polley at August 22, 2007 9:52 PM
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Comments
Well there's a difference between liquidity which is water and that which is sewage. Perhaps what we need is an effort to clean up this liquidity, rather than keeping it circulating. Dumping more water into the sewage isn't really helping much.
Posted by: donna at August 25, 2007 12:44 PM