• 856 days Will The ECB Continue To Hike Rates?
  • 856 days Forbes: Aramco Remains Largest Company In The Middle East
  • 858 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,258 days Could Crypto Overtake Traditional Investment?
  • 1,262 days Americans Still Quitting Jobs At Record Pace
  • 1,264 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,267 days Is The Dollar Too Strong?
  • 1,268 days Big Tech Disappoints Investors on Earnings Calls
  • 1,269 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,270 days China Is Quietly Trying To Distance Itself From Russia
  • 1,271 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,275 days Crypto Investors Won Big In 2021
  • 1,275 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,276 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,278 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,278 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,282 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,282 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,283 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,285 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

There Should Be a Quid Pro Quo between the Fed and Financial Institutions

The Fed's creation of various facilities in recent months - the Term Auction Facility (TAF) for depository institutions, the Term Securities Lending Facility (TSLF) for primary government securities dealers and the Primary Dealers Credit Facility (PDCF) - would be expected to alleviate some institutional liquidity issues that otherwise could metastasize into institutional solvency issues. Commercial and investment banks now can borrow against seemingly credit-worthy collateral with a much smaller "haircut" than otherwise. The Fed has created these new liquidity facilities in order to forestall a systemic failure of the financial system, not to enhance financial institution shareholder value.

A byproduct of the new Fed liquidity facilities, however, undoubtedly has been to enhance financial institutions' shareholder value - perhaps save for one. By the Fed taking onto its balance sheet less creditworthy collateral as result of these new facilities, U.S. taxpayers have increased contingent liabilities. (The Fed turns over to the Treasury each year the bulk of its profits. If the Fed were to sustain losses on its collateral, the amount of profits it turned over to the Treasury would be reduced.) Why should the current shareholders of financial institutions benefit at the expense of U.S. taxpayers in general?

In a case where man bites dog, it appears as though the Fed and the Treasury may be looking out for the interests of the U.S. taxpayer. Publicly, both Fed and Treasury officials have urged financial institutions to raise additional capital post haste. I am not privy to private conversations, but I would hope Fed and Treasury officials are directly communicating to the CEOs of large financial institutions with "skinny" capital positions that they will raise more capital. By raising more capital, the contingent liabilities of U.S. taxpayers will be reduced and the existing shareholders of these large financial institutions will bear some of the social costs of these new Fed facilities through a dilution of their ownership in the financial institutions.

 

Back to homepage

Leave a comment

Leave a comment