Whither the Discount Window Stigma?

The WSJ headline today implies great dilemmas on Wall Street. "Firms Wrestle With Loans’ Stigma", it says, explaining:

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.

It’s talking about the Fed’s new discount-rate facility, which is now open to investment banks. But of course firms didn’t want to borrow on Monday: they knew that the rate was going to come down by either 75bp or 100bp on Tuesday.

According to the WSJ, Lehman borrowed "a small amount" yesterday, and Goldman is likely to go to the window by the end of the week. The Fed is encouraging such activity, because they want it to be destigmatized.

At this point, however, there’s no stigma there, not any more. Once upon a time, there was a certain amount of stigma associated with a commercial bank borrowing from the discount window. Back in those days, discount-rate funds were 100bp more expensive than Fed funds, and interest rates were reasonably high to begin with.

Today, however, the spread between the discount rate and Fed funds is a mere 25bp, and Fed funds are only 2.25%. As a result, the cost of funds at the discount window is 2.5%, which is actually lower than the inflation rate: the real cost of discount-rate funds is negative. If you were an investment bank, you’d be silly not to tap that.

I’m told that Goldman has already borrowed money from this facility, and that Lehman’s borrowings are in the $2 billion range: if that’s true, good for them. There’s no point in looking this particular gift horse in the mouth.

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