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Steps Taken From The Fed Reserve

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Obviously Fed's want to turn the bad Subprime securities to something that people can Buy again, People buy it it's safe and is guaranteed by US Government.Did I hear Helicopters? Or that’s the noise from the Press…We no longer have a boom and boost economy, only small adjustments and it’s off again, It will never go down, only exponentially UP. :blink::blink::blink:

1. Flood the market with Liquidity

2. Lower the "discount rate"

3. Extend the period for borrowing from 1 to 30 days

4. Accept asset-backed commercial paper as collateral for the loans from the discount window, even when the assets were based on subprime loans.

5.Changed antitrust regulations for Large Banks, so that the bank could then lend money to brokers and dealers in its subsidiary, who would then lend it to clients. So this provided a route for the Fed to lend money to investors.

6. Use The policy to Directly provide liquidity to striken market


Bernanke Says Fannie, Freddie Asset Caps Should Stand (Update1)

The regulator for Fannie Mae and Freddie Mac on Aug. 10 rejected requests by the government-chartered firms to allow them to buy more home loans and help ease a credit crunch that has frozen the U.S. mortgage market.

Created by Congress to increase financing for home loans, Fannie Mae and Freddie Mac own or guarantee 40 percent of the nation's $10.9 trillion residential mortgage market. They profit by holding mortgages and mortgage-backed securities as investments and by charging a fee to guarantee and pool together home loans as bonds.


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Governor Eccles. That is a good way to put it, one cannot push a string.

We are in the depths of a depression and, as I have said several times before

this committee, beyond creating an easy money situation through reduction

of discount rates and through the creation of excess reserves, there is little, if

anything that the reserve organization can do toward bringing about recovery. I

believe that in a condition of great business activity that is developing to a point

of credit inflation monetary action can very eectively curb undue expansion.

[sic] (United States Congress, 1935, p. 376)

The remedy should come, I suggest, from a general recognition that the rate

of investment need not be beyond our control, if we are prepared to use our

banking systems to eect a proper adjustment of the market-rate of interest. It

might be suficient merely to produce a general belief in the long continuance of

a very low rate of short-term interest. The change, once it has begun, will feed

on itself. ...

The Bank of England and the Federal Reserve Board ... should pursue bank-rate

policy and open-market operations a outrance ... [t]hat is to say, they should

combine to maintain a very low level of the short-term rate of interest, and buy

long-dated securities ... until the short-term market is saturated. (p. 386).


A Precommitment Strategy

Specifically, the Fed would make a commitment to keep the Federal funds rate at a very low level for an extended,specified period of time. This would involve supplying more reserves in order to bring down rates covering a broader segment of the maturity spectrum.

Purchases of Long-Term Treasuries

Purchases of Foreign Exchang

Purchases of Private Sector Debt

Federal Reserve Lending

Reserves could be increased, for example, until some specified reflation occurred in broad commodity price indices, thereby signaling that deflation concerns are on the wane.

Seems that until they keep the general belief in Strong US economy and ability to repay the debts guaranteed by the government without trashing their Currency, everything should be OK.

In reality, we need real Trader to tell us where the breaking point is or if ever is going to occur. If US really have a Strong economy and can manage to escape spike in unemployment, this may well keep the belief and the fate. I am not an economist and I am only interested in the psychological side of the Panic, we can only say that a panic will develop if there is a reason to doubt something.

What we see now from the fed's is obviously a good actor, and I enjoy the show and the actors, don't really care what is going to happen, whatever happens I can only watch and enjoy, I bet some others do as well, for is not so often we can see such act unravel in front of our eyes, it must be so true that no generation learns from the foregoing, so I want to see it all for myself to believe in it, still love the helicopters sound though…

Edited by alabala

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Spot on. That's why the markets re-bounded today

...amazing ....the US set up is full of surprises..... :unsure::blink::huh:

Created by Congress to increase financing for home loans, Fannie Mae and Freddie Mac own or guarantee 40 percent of the $10.9 trillion U.S. residential mortgage market. They profit by holding mortgages and mortgage-backed securities as investments and by charging a fee to guarantee and pool together home loans as bonds.

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...amazing ....the US set up is full of surprises..... :unsure::blink::huh:

Exactly, why is he rejecting the Help from FF?

they have the best performing papers so far...

Bernanke is quite impresive, he rejects any help from the congress or what?

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“growing caution by lenders and unsettled conditions in financial markets more generally

[were] likely to be restraining aggregate demand in the future,” the Federal Reserve decreased

the target Fed Funds rate by 25 basis points on September 29, again on October 15, and once

more on November 17, 1998, where it remained for a year.22 In that episode, the Fed’s

injection of liquidity combined with normal market mechanisms alleviateed the pressure from

the short-run disruptions to the capital markets, so that a financial market crisis, driven by a

hedge fund collapse, had minimal real effects and did not reach systemic proportions.

In crisis, U.S. investors now seem to run to banks, not away from them. It is unclear, however,

how effective this substitution of bank credit for capital market credit would be over longer

time periods if capital market disruptions persisted.


May, 2006

The marketplace is the ultimate regulator and will control the hedge funds’ future. Ever more money is competing for a diminishing set of opportunities. Average profitability is already approaching rates on more commonplace assets when risk is factored in. Industry leaders are raising fees, returning money to their long time deep-pocketed backers and focusing on their own capital. Of the 8,000 current hedge funds, 20% will close their doors within one year. Retail investors, enticed by now-outdated headline returns, will move on as profits fall. During the shake-out, players with weak risk management will be winnowed out. There will be fewer but better hedge funds.


Hedge funds come and go. Estimates of hedge fund survival rates vary between 85%

and 95% (attrition rate of 5-15%) per year, depending on the year and the style of fund. In

their literature review, Chan et al. (2005) report that 30% of funds do not make it past three

years, and 40% of funds do not survive past the fifth year.


The risk to hedge funds and the market as a whole is

that a price decline in a particular asset class can

result in forced selling of multiple positions that is

magnified by the effects of leverage. For example, a

hedge fund leveraged at 4.0x could be forced to sell

25% of its assets in the event of an initial 5% price

decline, assuming that prices were not further

depressed by one or more sellers acting in concert.

An increase in margin requirements, which is not

uncommon in times of stress, and/or further selling-

driven price erosion, would amplify this effect.

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Bush's mortgage bailout just might work

If insider buying is any indication, home builders and financial-services providers expect dramatic reversals of fortune in the coming months.

With his stunning decision last week to let a federal housing agency guarantee mortgages of distressed homeowners, President Bush appears to have launched a "surge" in the financial markets to match the Pentagon's efforts in Iraq.

His plan seems straightforward: First, use winks and nods to convince his top Federal Reserve appointee, Ben Bernanke, that it would be in the best interest of both men to slash interest-rate targets by as much as a percentage point, and to do it quickly so the move has time to work its magic before the next election.

Second, use every lever available in the executive branch to provide a direct, emphatic bailout to overstretched mortgage holders at risk of foreclosure.

And third, dump as much of the financial burden for paying for the rescue of voters, aka homeowners, on the nation's banks, rather than on taxpayers.

If the market comes to believe his plan will succeed -- and the plan just might -- you can expect a rally in the shares of financial-services providers and home builders that will stun even the bulls, with big-cap banks such as Wells Fargo (WFC, news, msgs) and SunTrust Banks (STI, news, msgs) rising as much as 25% over the next 12 months and some beaten-down home builders doubling in value.

Bush bailout No. 2

Bush's surge solution for homeowners would, ironically, take a page from his father's rescue of Latin American governments and bankers in 1989 with a set of financial instruments that came to be known as Brady bonds. In that case, U.S. banks had lent billions of dollars to Latin American companies for use in economy building without obtaining sufficient collateral.

After thousands of loans went into default, it became clear that the money had been siphoned off by kleptocrats and crooks, and there was therefore no cash flow available for repayments. When U.S. banks clamored to be made whole, Latin American governments took over their citizens' obligations but did not have the ability to make payments, either.

Richard Bove, a banking analyst at brokerage Punk Ziegel, points out that the first Bush administration then had two choices: support U.S. banks and demand that the countries tax their people to pay back the loans, or blame the U.S. banks for making idiotic loans in the first place, force them to forgive the debts and let the crooks keep their booty.

President George H.W. Bush chose the latter in the interest of hemispheric amity and stability, and some creative geniuses in a Treasury Department headed by former Wall Street banker Nicholas Brady figured out a way for the governments of Mexico, Argentina and Brazil to convert the bad loans into dollar-denominated bonds that could be sold elsewhere. In effect, Bush 41 whisked bad credits off balance sheets south of the border with a stroke of a pen.

Now Bush 43 faces the same dilemma, only this time the bad loans are right here at home. His choices: He can thumb his nose at lenders who made stupid loans, castigate brainless homeowners who took out mortgages they could not repay, jail fraudster mortgage brokers who exploited a loosey-goosey system to generate exorbitant fees -- and stand smugly by as families in Republican strongholds across the West and South lose their homes. Or he could follow his dad's Brady bonds solution and basically forgive and forget by launching a mortgage bailout of unprecedented scope.

Ginnie and friends to the rescue

Based on Bush's announcement last week of a new Federal Housing Administration program to help around 80,000 at-risk homeowners obtain debt relief -- an effort modest in scope but stunning in its reversal of prior policy -- it's clear he will go for the latter in the interest of helping his party avoid a wipeout next November.

Bove notes that a precedent for a widespread mortgage-assistance program lies in the Emergency Home Finance Act of 1970, which established these mechanisms to help challenged households:

Banks would originate mortgage loans with 1% interest rates.

The Federal Housing Administration and Department of Veterans Affairs would insure the loans against loss.

The Government National Mortgage Association, aka Ginnie Mae, would buy the mortgages at par from the banks, allowing the banks to make a small profit.

Ginnie Mae, taking a sizable loss, would then sell these loans to Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) at a discount so that the buyers would earn reasonable yields.

Fannie and Freddie would fund these purchases with low-cost, government-guaranteed debt.

As a result, Bove speculates, tens of thousands of at-risk homeowners would get to keep their homes. Ginnie Mae would lose tens of billions of dollars that would be repaid by banks and taxpayers at a pace and in a manner similar to the Iraq reconstruction effort. Fannie Mae and Freddie Mac would end up with huge increases in the sizes of their portfolios. And, most importantly, the nationwide housing collapse would disappear as an election theme for Democrats.

Although this may seem a bit far-fetched, insiders in the financial services and home-building industries are buying their own companies' shares these days at a record pace -- essentially betting that something like this scenario will transpire. Home-building companies' executives bought $15.9 million worth of their firms' annihilated shares in August, the largest monthly purchase in the sector since Thomson Financial started keeping track in 1990.

The last time that insiders even came close to this level of buying, in September 2001, the sector rose 55% in value over the next six months while the S&P 500 Index ($INX) advanced 10%. Thomson analysts suggest raw valuation is a factor in insiders' zeal for their stocks -- as the price-to-book value of the sector hit 0.75 last month, the lowest since October 1990 -- but clearly a larger motivating force is at work.

The bottom line is that Bush has ample tools at his disposal to make the foreclosure crisis vanish if he is willing to make a financial and political commitment on a par with his pledge to stabilize Iraq. With almost one in every 7.5 housing units in the United States empty due to overbuilding during the easy-money years, it would take years for enough demand to emerge under normal conditions to soak up supply. But don't underestimate the president's capacity and motivation to speed up the process with a surge of looser credit and check writing.

Edited by alabala

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"Bernanke pulled the safety pins out of the banking system when he waived the 10% affiliated capital limits. This was done for ONE bank back earlier this year, but just recently, he did it for four large primary banks..."

This is why commentators are missing the market when they say the Fed is contracting the money supply -- while that may be true for us Main Streeters, it is NOT true for the major banks, because these kind of exemptions have massive implications for reserve capital. In short, they have the effect of allowing large amounts of "off-balance-sheet" leverage at the major banks. The Fed doesn't want any unsightly "implosions" here like the Germans, Canadians, and French have seen (due to our own unsound capital markets).


September 12, 2007

Deutsche Bank AG

August 20, 2007

JPMorgan Chase & Co

August 20, 2007

Bank of America Corporation

August 20, 2007

Citigroup Inc

June 12, 2007

Wachovia Corporation

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"Bernanke pulled the safety pins out of the banking system when he waived the 10% affiliated capital limits. This was done for ONE bank back earlier this year, but just recently, he did it for four large primary banks..."

That sounds disturbing really. But many said this already at the time when it occured.

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No Helicopter Drop For Failed Banks

No Helicopter Drop By The Fed

The key point above is there is no grounds for a "helicopter drop" by the Fed. Furthermore, the Fed would not take such action even if they could. The Fed is a private business, it would not give away free money even if it could, just as Pizza Hut is not going to give away free pizzas to everyone for a year.

It is amazing the powers people attribute to the Fed. Close examination shows those powers are nothing but a smoke and mirrors Ponzi scheme that blows bigger bubble after bigger bubble, crisis after crisis.

The Fed has indeed wrecked the economy by its serial bubble blowing activity. However, the Fed is powerless to "fix" it, because the only "fix" the Fed has is the very same Ponzi scheme of repetitive bubble blowing that wrecked it. The only legitimate long term fix is to abolish the Fed and let the free market cure the problem over time. Further attempts by the Fed or Congress to "fix" things will only make matters worse.

All Ponzi schemes eventually implode, and this Ponzi scheme of repetitive bubble blowing is imploding now. History shows that once confidence is lost in the Ponzi scheme by either the lenders or borrowers, it is all over. Well guess what: It's all over. Those expecting a "helicopter drop" of capital from the Fed to fix this mess will be sadly mistaken.

Edited by alabala

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ST. LOUIS (Reuters) - Inflation expectations are "quite well anchored," giving the Federal Reserve breathing room for further possible rate cuts, but there is no clear evidence that a recession is at hand, a top Fed policy-maker said on Wednesday.

St. Louis Federal Reserve Bank President William Poole said the Fed did not have to worry that rate cuts would allow inflation expectations to get out of hand.

"Stable inflation expectations give the Federal Reserve a lot of room for maneuver," he told reporters after delivering a speech here.

"If the evidence suggests that substantial policy easing is appropriate, I don't think we're going to face a risk of adverse inflation expectation consequences," he said.

Poole emphasized that the odds of a U.S. recession "are certainly high enough to worry about, but I don't believe inflation risks are absent either."

Oil has hit $100 a barrel and Poole warned higher energy prices could spread, while also noting that the country's employment position was still pretty strong despite a weak reading last month. The rate of U.S. unemployment jumped to 5 percent last month from 4.7 percent in November.

"It was a weak number...(but) it was not a report of the sort that we saw in October, November and December 2001. In those three months we lost one million jobs. The report was not of that magnitude," Poole said, referring to the aftermath of the September 11 attacks on the United States.

Poole, not a voting member of the Fed's interest rate setting committee this year, retires at the end of March. His successor at the head of the St. Louis Fed has yet to be named.

The Fed has slashed its key interest rate a full percentage point since mid-September to 4.25 percent to shield the economy from a housing slump and credit crunch. Investors expect it will lower borrowing costs again at its next meeting, on January 29-30, but opinion is split on whether it will cut 25 or 50 basis points.


In earlier remarks to the Financial Planning Association of Missouri and Southern Illinois, Poole said the Fed would continue to watch both recession and inflation risks.

"Recession risks are primarily a consequence of financial turmoil, which has threatened to spread housing industry woes to the broader economy," Poole said.

"Will housing sector problems push the economy into recession? It is too early to tell right now, but what we can do is to examine the current situation closely and learn from it," he said in his speech, which mainly addressed the needs of better financial education.

In conclusion, he struck a broadly optimistic tone in his speech, arguing that U.S. economic fundamentals were sound.

"The current financial turmoil will take a while to play itself out. The fundamentals of our economy remain strong, however, and 2008 looks to be a year of rising growth. Economic forecasters expect slow expansion in the first half of the year and a quickening pace in the second half," he said.

He also said that the dollar exchange rate would not go "way south" provided that the Fed maintained price stability, but cautioned that "predicting short-term exchange rate moves is a crap shoot."

Poole said there was substantial uncertainly in the economic outlook, but the signs do not all point down.

"We need to base our policy on the basis of what is happening. We know there are lots of things that might happen," Poole said. "I think it is a mistake ... to say that we clearly and unambiguously have evidence that a recession is at hand."

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