The doors are open at the FRB
Investment firms borrowed over $270 Billion dollars from the Federal Reserve last week for an average of just under $33 Billion per day. The Federal Reserve has practically opened its doors to banks who need the cash to calm liquidity concerns. The first week of the new program prompted about $100 Billion in loans, an amount that has nearly tripled over the course of one week. Banks raised their borrowing by nearly 7-fold as they trade worthless assets for more cash. The Federal Reserve now allows banks to use mortgage backed securities and other assets as collateral for new loans, even if the value of the collateral is much lower than its stated value.
Even more troubling is another $75 Billion in treasuries was auctioned at a rate of just .33%. The Fed received over $80 billion in bids but will only be honoring $75 Billion at the best interest rate. This is free money for the banks as the treasury yield is still much higher than .33%, in fact the rate is about 6 times higher even for the shortest interest cycle. The Fed is practically handing banks free cash.
This also comes as rumors about Merrill Lynch begin to spread, many insiders are expecting that Merrill could be the next Bear Stearns as it has billions in mortgage backed securities. There isn’t a single investment bank that you want to be holding at this point, perhaps just JP Morgan but even then, this is no time to be shopping for financials. The bust is not over until the housing market corrects, which won’t happen for many years. There just isn’t enough liquidity to push prices higher, the only thing that can happen here is home values fall. For the real estate investor, get out while you still can.