What a Deal: Trash for Treasuries

[flashl]

SAVING the nation’s financial system from reckless banks and brokerage firms is an enormous job, heaven knows. But somebody’s got to do it, so the Federal Reserve Board, with its taxpayer-funded balance sheet, stepped in.

To grease the gears of the nation’s seized-up credit markets, the New York Fed in recent months created three new lending entities. Together, they allow banks and financial firms to swap up to $350 billion of securities they cannot sell for cash or United States Treasuries.

The entities will stay in business as long as the markets for mortgage securities and other orphaned “investments” are closed, the Fed said. This allows institutions to exchange their trash for cash that they can turn around and lend to corporations or individuals.

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In early April, for instance, the Fed had to turn away many of the nation’s largest brokerage firms when they showed up, trash bags a-bulging, at the lending entity created just for them. These firms hoped to unload securities valued at almost twice what the Fed was offering to lend.

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More worrisome ... is the fact that the Fed doesn’t examine the basis for bestowing a triple-A rating on these securities. Are they triple-A based on the soundness of the issuer? Or because of an insurance policy guaranteed by M.B.I.A. or the Ambac Financial Group, the troubled financial guarantors?

NY Times