Federal Reserve allows Citigroup to elude key banking rule - Aug. 24, 2007
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.
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.
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