The Fed won’t just lend out $40 billion in an attempt to inject some liquidity
into the banking system, oh no. It requires collateral. But, as jck says in
the comments
to my earlier blog entry, it seems as though "any junk will do" in
terms of the collateral the Fed will accept.
The details can be found on the Fed’s website,
where the margin
tables can be downloaded in Excel or PDF form. But to give you an idea of
what the Fed will lend, consider a AAA-rated subprime-backed CDO – the
kind of thing which is causing billions of dollars in losses all over the financial
system. If the CDO has a market price, the Fed will lend up to 98% of that price
if it’s a short-term CDO, up to 96% if it’s medium-term, and up to 93% if it’s
long-term.
But what if the CDO is completely illiquid, and you can’t find a price for
it at all? No worries, the Fed will still accept it as collateral, and lend
up to 85% of par value. (There’s an interesting thought experiment here: what
happens if a long-term CDO has a market value of, say, 90 cents on the dollar?
In that case, an illiquid version of that CDO would actually be worth more to
the Fed than the liquid version.)
Do keep on looking down that list, though: it turns out that banks can even
put up as collateral subprime credit-card receivables – they don’t even
need a AAA rating.
Now it’s worth noting that the Fed is going to be repaid on its loans
no matter what happens to the collateral. We’re not talking non-recourse loans
here: there’s really no chance that one of the Fed’s borrowing banks is going
to suddenly go bankrupt and leave the Fed holding some paper of dubious value.
But it certainly seems that any bank sitting on a bunch of nuclear waste and
suffering from liquidity problems has now found its savior in the Federal Reserve.
As Steve
Waldman says, never mind the mortgage plan – this is a bailout.