Monday, August 27, 2007

Fed eases banking rule to assist big banks in liquidity crunch

Federal Reserve allows Citigroup to elude key banking rule - Aug. 24, 2007
So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.
$25 billion each for two of the US' largest banks? Wow.

It's actually a little ironic, or obvious, that the liquidity crunch was precipitated by one of the most illiquid financial assets around -- housing.

I think that's part of the problem: Housing securities (not the houses themselves) became extremely liquid. Liquid beyond belief. Liquidity is usually (not always) associated with low-risk securities. Not so here.