Quelle Surprise! Wall Street Reluctant to Borrow at New Discount Window

The Wall Street Journal reports that primary dealers have been loath to use their new-found access to the discount window (technically, it’s a “temporary clone of the discount window”), despite the favorable rates on offer. Why? For commercial banks, the assumption is that only the distressed would go to the Fed for dough (the discount window was originally designed for emergencies). In these jittery and rumor-prone markets, the last thing you want to do is create concerns. Bear’s liquidity went poof in a mere three days.

This response was entirely predictable. As we said when primary dealers were granted access on Monday:

This move is intended to last only for six months, but if the financial markets continue to be rocky (likely) and broker dealers use the facility, it’s hard to know how long it will take to wean them off it. However, use of the discount window has been seen as a sign of weakness, and use has therefore been minimal. That may mean this move proves to be largely symbolic, since the broker-dealers may not avail themselves of it either. The next measure would then be to allow them to use the TAF. Expect that to come soon.

Indeed, we saw the same behavior the Fed lowered discount rates last August to encourage greater use. But it got few takers, even though four big firms, Bank of America, Citi, J.P. Morgan, and Wachovia each took down $500 million each to try to alleviate the negative taint. But of course, Citi was considered a strong player back then.

From the Wall Street Journal:

The Federal Reserve’s emergency decision last weekend to extend borrowing to investment banks was designed to stem a worsening credit crisis ravaging the financial markets. The question is: Will it work?

Wall Street firms were reluctant to borrow from the program Monday out of concern it could be seen as a sign of weakness, if their identities became known.

Late yesterday, Lehman Brothers borrowed a small amount, according to a person familiar with the transaction, and Goldman Sachs is likely to do the same before the end of the week. Because Goldman Sachs is seen as financially stronger than some of its counterparts, that could diminish any stigma and encourage other firms to step forward….

The new loan facility works much like the Fed’s discount window, the central bank’s traditional tool for lending directly to banks. Banks, which hold customer deposits and are regulated by the Fed, have long been able to use the discount window to meet emergency funding needs. But they have been somewhat leery about using it, because of concerns that if word got around, they might be stigmatized as distressed institutions….

Fed officials maintain that just the existence of all of its expanded lending programs is an important confidence builder. Even if the new program for securities firms isn’t used much at first, “the Fed may decide it doesn’t mind making this a remote backstop,” said Lou Crandall, chief economist at Wrightson-ICAP.

Firms are expected to use the new program to help get financing for clients, such as hedge funds, that are facing liquidity problems.

The Fed did say at the time of the announcement that the primary dealers could act as conduits and submit collateral on behalf of counterparties. But how will Main Street react when it learns that the Fed is helping hedge fund while individual borrowers are under stress?

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  1. S

    with rumors abounding that there were multiple bidders for Bear thew new facility has the appearance of hush money. Also note both Lehman and Goldman openly cheered the “cheap” financing on their calls. Lehman will go make no mistake and GS will too. I think the whole stigma is overdone at this point. don;t you think. For those not yet attune to their acions they bailed out bear, have fofrestalled a run on Lehman for now and are bailing out the commercial banks to the tune of $500 plus bilion. If they are worried about stigma there is something seriously wrong.

  2. Anonymous

    If the FED wants to remove the stigma from using the discount window, they should open it to everyone one. I don’t know about you but I think it would be kewl to have an account at the FED.

  3. S

    CNBC reporting that LEH and GS have already gone to the window. Then again it is CNBC. Nevertheless, some brokers out with notes talking about mas further writedowns on the $80B portfolio of mortgages on LEH balance sheet. Another PIMCO shill on TV this morning pumping dea of buying mortgages to put a floor on house prices.

  4. fmo


    is this one nonrecourse or general obligation? the borrowing windows are general obligation, im almost sure, and one of the new term repo deals was nonrecourse…

    is it the case that primary dealer X can post collateral given it by counterparty Y on a nonrecourse basis so the entire risk is on the fed or would primary dealer X still be liable for undercollateralization

    this is a huge big deal if its nonrecourse as it confirms that between this and fannie/freddie the govt has agreed to virtual bailout by stuffing the risk in agencies and the fed such that it will “have” to bail them if they blow but until then it looks like the govt isnt bailing…

  5. S

    Per Beth Callan (LEH CFO) the haircuts on colalteral are VERY attractive. LEH balance sheet is stuffed to the hilt with bad paper – I suspect this wasn;t the last run on them

  6. S

    From Alea blog…

    “Fischer Black on Monetary Policies
    Active monetary policies creates opportunities for speculators, but have no significant macroeconomic effects

  7. Anonymous

    The wall street crack smokers do not like to do business in broad daylight, they like instead the old days when no one was watching. This is a fun game, where Helicopter ben offers free coke, but no one takes the bait…LOL! Cat and mouse with a systemic collapse versus someone taking charge and playing hardball. This scam is not how you re-build confidence, faith or trust, but it does make everyone even more suspect!

  8. Empire

    I’m with you, Anonymous at 7:34 AM. Plus I have a big stack of copier paper right here that’s at least as valuable as the paper the banks are putting up as collateral.

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